he US Dollar continued to advance overnight against all major peers as Fitch Ratings announced it could downgrade US’s AAA credit rating, reflecting the political tensions that are preventing a deal to neutralize the country’s debt-ceiling crisis.
The Bloomberg Spot Index has touched the highest level since the 20th of March and USD/JPY is on its way to 140. EUR/USD continues to underperform for the third consecutive day, trading mid 1.07-1.08. GBP/USD follows the trend and declines for the fourth day in a row, struggling to keep above 1.24.
The drop in the UK’s CPI inflation in April was not what the Bank of England wanted to see and another 25-basis points rate hike is back on the cards. Inflation in the UK proves to remain sticky, with food inflation as a great contributor, only dropping to 19.3% from the previous 19.6%. Core inflation came as a surprise too, rising to 6.8% from 6.2% in March. We are expecting inflation to drop through the summer, which should support a pause by the BOE later in August. The main risk is that interest rates will have to tick above 5% to tame inflation, which will have an impact on UK’s economic development and credit conditions.
Last night’s FOMC minutes release showed that officials are split on more rate hikes, and cuts are still unlikely, suggesting an ongoing data-dependent approach by the Federal Reserve. The minutes showed that the Fed remains worried about inflation, which is no surprise as several officials have stressed the importance of the fight against inflation throughout the month. Across the board, the minutes matched market expectations but traders remain alert for new debt-ceiling headlines and developments.