Ze Germans and Le French release updated inflation numbers tomorrow and Mark Carney hosts another quarterly inflation report.
At the sametime as the inflation report we get UK labour data and the focus will be on the wage element more so than the claimant numbers. The data lags the claims by a month so we’ll be getting the June wage data not July.
Average weekly earnings fell in May to 0.3% from a revised up 0.8% in April. The number is a 3 month rolling average. The market is not going to start pricing in inflation pressures from wages until they get well over 1.0% and probably not seriously until we cross the 2.0% threshold, as that will bring up to around inflation levels.
A fall to -0.1% is expected in earnings so any decent jump to near 1.0% or over will be met with some pound buying. There is a lot of other noise that can negate that one item though so don’t go all in on that figure.
On to inflation. This is where the wages trade will come into the picture. In my mind there hasn’t been enough wage growth seen anywhere to warrant a hawkish report. We’ve also seen some of the data slowing down in line with the BOE’s estimate of a slower H2 and that (and the usual noted slack) will probably be the stick that will be used to fend off any inflation questions. The inflation forecasts will likely be left unchanged and if the are changed they will probably be lowered. It’s an area to watch.
As with all these reports inflation will be talked about only marginally and the rest of the economy and interest rates will be the focus. The event just becomes an belated BOE/MPC policy press conference in the main and you can bet questions will be asked on MPC members voting habits.
On that basis the downside for the pound looks to be the most likely outcome. Any further distancing from the Mansion House comments and an early rate rise will add to the falls. The question is how far will the market let any falls go, as perhaps most of the rate expectations are priced in?
Decisions, decisions. I like to take a longer view with the majority of my trades and so I’m going to be liking the downside for scaling in longs, especially if we go down despite strong wage numbers. While Europe may have crapped all over my inflation and economic trades, the UK and US are still very much in the game and I think they are getting complacent over inflation.
As for the upside of the pound, a break of 1.6900 could see some shorts shaken out and would push cable up towards 1.70. If we do I’ll be looking to short as we’ve got some decent US data in the rest of the week that should follow the recent good trend. This will bring the USD upside into focus.
So there you have it. Some food for thought for tomorrow.
