UK ELECTIONS - For all of you that had a long weekend, I hope you enjoyed. We're getting back into fuller trade right now and we will have the added kick today and tomorrow of month end flow. Quite often you will see some of the bigger players square up or adjust positions and this activity can invite volatility on its own. I'm still waiting on EURGBP and AUDNZD as I've highlighted in recent reports and we'll see if we can get involved today. There has clearly been renewed concern around the UK election outcome, with the Labour party looking like it's going to make a tighter race of it than many had thought. This has been having a negative impact on the Pound, though this type of back and forth was to be expected and I'm still thinking initial expectations will be met when it comes to election day.
US DOLLAR - But right now, the focus has shifted back to the US Dollar and to US economic data. The Fed has made it abundantly clear that it has plans to hike rates two more times this year, something the market isn't ready to buy into. But the Fed has given the market some leverage, after saying that it wanted to wait a little longer to confirm a recent slowdown of US economic data was in fact transitory. Last Friday, we got a healthy dose of US economic data and this has definitely helped the US Dollar as it suggests the downturn in US data that we had seen in the first quarter was transitory and the Fed can go ahead with two more hikes. But again, this is how the data needs to be going forward on a consistent basis.
INFLATION - Later today, we will get another healthy batch of US data to assess. It will be worth keeping an eye on the core PCE reading in particular, as this reading serves as an inflation gauge for the Fed and anything on the hotter side will increase pressure for the Fed to follow through with those two hikes, something that will invite US Dollar demand. I think inflation is the real X factor going forward. The Fed has had the luxury of holding off on raising rates because inflation has been so subdued. But if inflation readings start to shoot up, even if the Fed wants to hold off, it will no longer have the ability to do so. This could be a bigger story going forward.