Sterling edges off ten-year lows on Italian political concerns

taly’s Deputy Prime Minister Matteo Salvini has threatened to bring down the ruling Five Star Movement coalition in the past few days. Salvini issued a motion of no confidence in the party last week, dramatically removing its support as coalition partner and paving the way for potential snap elections in the country. This has drawn investors gaze away from the political mess that is Brexit and in turn provided the Pound with some much needed respite from its recent heavy sell-off. Heightened concerns over a ‘no deal’ brexit has seen the Pound fall below the 1.08 mark to its lowest level in a decade against the common currency.

This morning’s UK labour report does, as always, have the potential to shift the Pound. Despite last week’s data confirming that the UK economy actually contracted in the second quarter of the year, recent employment news has been encouraging, with this morning’s data expected to be no exception. Investors are eyeing an increase in wages to 3.8% excluding bonus from the previous 3.6%, which would be its highest level in over a decade. Confirmation of this would reaffirm our optimistic view regarding the potential for a broad pick-up in overall UK consumer activity in the second half of the year.

Will today’s US inflation data shift the dollar?

News out of the US has been relatively light on the ground in the past week or so, with EUR/USD largely driven by news out of Italy in the past 24 hours.

The pair briefly slipped to a seven day low on Monday, although was back trading around the 1.12 level as London trading opened this morning. Activity in the US should pick up this week following a fairly uneventful one last week. This afternoon’s US inflation data could be one of the more important economic releases on the calendar, given its potential impact on Federal Reserve monetary policy.

Financial markets are now back pricing in two full rate cuts from the Fed during the remainder of the year. The market has taken the view that the recent escalation in US-China trade tensions will force the FOMC’s hand at its September meeting. While an upside surprise in today’s inflation news will therefore not derail the chances of another cut next month, it could cause investors to rethink the possibility of further easing in December.

Once today’s inflation data is out of the way, investors will shift their attention to Thursday’s US retail sales data, generally seen as one of the more important data releases on the economic calendar.