Sterling Dips on May Headlines, Quickly Recovers

After weakening modestly yesterday, the greenback gained against its European counterparts overnight.

Overview

However, the Bloomberg Dollar Index is 0.2% lower. Markets remain quiet ahead of a slew of central bank headlines later this week. The Federal Reserve’s James Bullard and Lael Brainard speak at different events later this morning. Market participants have continued to pile on bets that the Federal Reserve will raise rates an additional two times this year, with the next hike set for later this month. Fed Funds futures show a 77% chance of two hikes by December, the highest percentage yet.

This morning’s docket showed that U.S. producer prices unexpectedly fell in August. The 0.1% decline is the first drop in 18 months, according to the Labor Department. The slight decline in inflationary pressure has done little to weaken the dollar or to change expectations of future monetary policy. Tomorrow’s consumer price index will be more closely watched. The Fed will release its Beige book this afternoon.

EUR

The Euro dipped lower on speculation the European Central bank will lower its growth outlook. The central bank is expected to hold rates on Thursday. The ECB is expected to finger global trade tensions as a major headwind to growth will cut their prediction for output. The gloomier outlook for the economy will come as the ECB prepares to end its stimulus. We believe the tweaks to the growth outlook will not deter the ECB. EUR/USD will likely stick to close ranges ahead of the ECB meeting tomorrow morning.

GBP

The British pound took a spill in early trading before recouping most of its losses on political headlines out of the U.K. Pro-Brexit lawmakers in the Conservative party were reported to have spent hours discussing the ousting of the Prime Minister for her perceived soft approach to Brexit.

The U.K. and the E.U. are reported to be planning a special summit to sign a Brexit deal by November.

The Bank of England will meet tomorrow and are expected to keep hates on hold after August’s “dovish hike.”