By Kathy Lien. Thursday is a big day for euro and sterling. There are 2 monetary policy announcements on the calendar and the U.S. consumer price report. This means that not only will we learn how eager central banks in Europe are to tighten monetary policy but we’ll also see how much pressure there is for the Federal Reserve to continue raising interest rates. The U.S. dollar traded lower against all of the major currencies Wednesday after an unexpected decline in PPI. Producer prices fell for the first time in 18 months as oil prices stabilized and the dollar strengthened. CPI could be vulnerable to the same forces, especially as gas prices held steady last month. With that in mind and according to the Beige Book, a few Fed districts reported an increase in inflation pressures. However the dollar did not respond well to the Fed’s report because even though it said prices are rising in some areas and the economy expanded at a moderate pace, most districts noted concern and uncertainty over trade. They also did not see significant wage growth despite the tightness of labor market. There’s no question that the Fed will raise rates later this month, especially with input costs rising but if CPI falls short of expectations, it will give investors another excuse to sell dollars. Although USD/JPY is consolidating between 110.50 and 111.80, the greenback could retreat more significantly against other currencies.

How the USD trades vs. EUR and GBP will depend in large part on the tone of the European Central Bank and Bank of England monetary policy announcements. Both central banks are expected to leave interest rates unchanged so their guidance is key. We’ll start with the BoE since their rate decision precedes the ECB. First, it's important to know that there will be no press conference by Governor Carney but the MPC minutes will be released alongside the rate decision. Sterling is trading strongly ahead of the monetary policy announcement on the growing possibility of a Brexit deal and if the tone of the BoE statement is positive, we could see GBP/USD squeeze up to 1.3175. According to the table below, we’ve seen improvements in retail sales, trade, inflation and wage growth but manufacturing-, service- and construction-sector activity slowed last month. The market is not pricing in another rate hike from the BoE until the middle of next year. Sterling traders however won’t be as patient as the central bank as any talk of more tightening this year or next could scare away the shorts.

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