Don't be too optimistic over better UK inflation data

Good morning

Well I have to start by congratulating Arsenal on winning the premier league title, the victory coming as Man City could only manage a draw with Bournemouth last night.  A lot of attention has been put on Arsenal’s unexciting match play but good teams are the ones that can grind out the 1-0 wins even when they are not playing so well.  Arsenal still have the potential to do the double with the Champions League final to be played at the end of this month.

Meanwhile Spurs lost 2-1 to Chelsea, another match that pretty much summed up Spurs season.  They played well, then conceded, then gave a goal away with an errant pass, punished for another moment of individual error, then have what many seem to think is a pretty clear VAR decision go against them.  VAR is not the reason for Spurs being where they are but they certainly haven’t been helped this season.  And Spurs are not the only ones.  VAR, a system that is supposed to make things clearer and fairer, is frustrating fans across the country with bad decisions and inconsistences.  Must do better.  Spurs premier league survival now rests on their result against Everton, and West Ham’s result against Leeds on Sunday.

On the subject of league survival, Southampton have been handed an exceptionally harsh punishment for spying on rival teams this season.  They have been expelled from the ply off final on Saturday, Middlesbrough will take their place.  The deduction of four points in the Championship next season is nothing compared to the possible cost of them missing out on Premier League football, valued as over £100m in TV rights alone.  Southampton have appealed.

To the markets, and a wave of negative risk sentiment is doing the rounds as Trump once again warns Iran of massive military action of a deal is not agreed soon.  The longer this goes on, the greater the chance of renewed military action.  The energy crisis is starting to hurt, UK are talking about easing sanctions on Russian oil and NATO are said to be talking about plans to help reopen the Strait of Hormuz if it is still shut in July, although it is not clear how this would take place.  ECBs Kocker says they are looking at rate rises in June unless energy supply recovers.  Bond yields remain elevated which, according to some, is having a larger impact on the global economy than spiralling energy prices. 

GBP has shrugged off lower than expected inflation data this morning.  Headline CPI came in at 2.85% from 3.3% last time while core CPI was down to 2.5% from 3.1% previously.  The market is looking at a couple of reasons for this.  First, the price cap which is holding down energy prices despite the Middle East crisis.  The cap will not last forever.  Also being highlighted is the sharp rises in water bills and car tax this time last year which, fortunately, have not been repeated to the same extent this year.  All these are temporary though and there seems little doubt that inflation will rise in the coming months.  Rachel Reeves has asked supermarkets to cap price rises on food in order to keep inflation under control.  Clever, I’m sure they will listen!  She is also likely to announce plans of a support package to counter high energy costs. 

GBPUSD is broadly unchanged around 1.3400, GBPEUR is 1.1550 with EURUSD now 1.1600.  USDJPY is stuck in the high 158’s but has been capped around 159 so far this morning.  I think renewed attacks on Iran are likely and under-priced.  Presuming we’d see a strong US dollar if attacks do restart I’m going to look at short-dated upside USD ideas, perhaps lower EURUSD or lower AUDUSD, given AUD sometimes bears the brunt of lower risk sentiment. 

EU inflation out this morning but that generally comes and goes with minimal fuss.  The rest of the day is quiet, we’ll have FOMC minutes from their latest meeting this evening.  It could be livelier overnight with NZ trade data and plenty of Aussie data including PMIs, inflation expectations and employment. 

Best of luck to Aston Villa who take on Freiburg in the Europa League final this evening.

Have a great day…

-  10.00 EU HICP

-  19.00 FOMC minutes

-  19.10 ECBs Sleijpen speaks

-  23.45 NZ trade balance

-  00.00 AUS S&P manufacturing, services PMI

-  00.50 Japan trade balance

-  02.00 AUS consumer inflation expectations

-  02.30 AUS employment