Dollar Weaker Ahead of Key Inflation Data

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Market Drivers May 26, 2017
USDJPY takes out 111.00
Cable under pressure on weak Tory polls
Nikkei -0.64% Dax -0.34%
Oil $49/bbl
Gold $1266/oz.

Europe and Asia:
JPY CPI 0.3% vs. 0.4%

North America:
USD GDP 8:30
USD PCE 8:30
USD Durable Goods 8:30
USD U of M 9:50

The dollar was mixed on the last trading day of the week ahead of key US GDP and inflation data due 12:30 GMT. The greenback was markedly weaker against the yen with USDJPY dropping below the 111.00 figure but stronger against cable which approached the 1.2850 mark in morning London trade.

Sterling was beset by its own woes as the latest batch of polls from UK indicated that the Tory lead had evaporated to a mere 5% with two week to go before election. UK polls are notoriously inaccurate but the news nevertheless sent the markets scrambling with cable offered all night long.

Prime Minister May made a calculated decision to call early elections in hopes of winning a supermajority in Parliament so that she could have a strong hand in Brexit negotiations. However a series of missteps over the past few weeks have turned public opinion against her. Her ability as a politician is sorely tested and should the Tories lose it would be one of the most remarkable political failures in recent memory.

By all accounts Tories are still likely to win a majority in Parliament, but if their standing is actually weaker Ms. May will have managed to snatch defeat from the jaws of victory and that no doubt could impact cable negatively.

With elections only two weeks away the markets will now begin to pay close attention to polling and sterling could become more volatile as a result. For now the pair has topped at the 1.3000 level which will remain key resistance for time being.

In North America today, US data could hold the key to USDJPY direction. Today’s US PCE inflation reading will be must watching for the FX market. The Fed has been concerned about the slugging pace of inflation and it may be the one variable that prevents the FOMC from hiking rates three time this year. Last night SF Fed Chief Williams reiterated his view that three more hikes in 2017 are appropriate, but he is in the minority and if the core PCE reading dips below the 2% level, USDJPY could see a vicious selloff as US rates compress further.

Boris Schlossberg
Managing Director

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