Pound Eyes Wages Data for Policy Clues, US Dollar May Rise on CPI

Talking Points:

British Pound Looks to Wage Growth Figures to Inform BOE Rate Hike Bets
US Dollar to Rise if Firm Core CPI Print Steepens Expected Fed Rates Path
Aussie Dollar Slumps, Yen Outperforms as Risk Aversion Returns Overnight

UK labor-market data headlines the economic calendar in European hours. Jobless claims are expected to rise for a fifth consecutive month, but traders are likely to pay more attention to the pace of wage growth. Core inflation is unlikely to gain enough traction to overcome imported headwinds from commodity prices and the Eurozone without a meaningful pickup on this front.

The rate of increase in average weekly earnings is seen slowing for a second consecutive month, which could compound pressure on rate hike bets and weigh on the British Pound. Yesterday’s similarly-themed comments from BOE Governor Mark Carney have already punished the currency however, so follow-through may be limited.

Later in the day, the spotlight will to the US CPI report. The core year-on-year inflation rate is expected to rise to 2.1 percent, a three-year high. Leading survey data offers conflicting signals. A firm print may breathe new life into the Fed rate hike outlook, sending the US Dollar broadly higher.

While a soft result is likely to yield the opposite result, follow-through may be more limited than the alternative. Tightening bets have already floundered since the start of the year, with the 2016 rates path implied by Fed Funds futures registering as the most accommodative in three months. On balance, this seems to make a dovish surprise relatively less likely.

Risk aversion returned as the driving catalyst for currency markets in overnight trade. The sentiment-sensitive Australian and Canadian Dollars traded lower alongside Asian stock prices. The New Zealand Dollar likewise fell, but the move was instigated before risk-off momentum gathered steam and followed a disappointing set of CPI figures. The anti-risk Euro, Yen and Swiss Franc outperformed.

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