The focus this week will be on interest rates in the US and the UK. Before the banking concerns, the markets expected the Bank of England (BoE) to raise rates. The decision on Thursday and may now be a close call, given the comments from policymakers previously. The feeling is that rates are close to a peak with inflation falling and if there is any further banking disruption, further support, and less tight financial conditions may be desirable. The vote for a hike was 7-2 last time and we are likely to see a split again, with markets expecting a 0.25% hike.
Along with the rate decision, any comments around their decision-making and forward guidance will clearly affect the markets. Last week we saw employment rise, with the unemployment rate static at 3.7%. In a positive step regarding inflation, wage growth slowed. The Chancellor offered some measures to provide additional stimulus measures in the Budget. The support around energy prices is expected to help to reduce inflation over the next few months.
With equity and bond markets reacting sharply to the issues with SVB, Credit Suisse, and others, the other UK data will perhaps be overshadowed. The inflation number for February will likely fall below 10%, which will give the BoE some comfort. The PMI data will also give a forward-looking view on activity in the economy, with the composite expected to hold above 50, signaling expansion.
GBPEUR – 1.1428
GBPUSD – 1.2184
Last week, the Eurozone Central Bank stuck to its guns and raised rates by a further 0.5%. This was the first major central bank update following the banking disruptions. Given the market sensitivity, some thought they may opt for a smaller hike, but they continued the path they signaled at the previous meeting. The one change they made was to their forward guidance, suggesting future hikes will be dependent on the data.
Along with the other central banks, the ECB wants to continue to target inflation but wants to retain some more flexibility if the market disruption spreads and if inflation falls further. The ECB stands ready to provide liquidity support if needed. This week, the German ZEW survey, European consumer confidence, and PMIs will give further insight into how the economy is bearing up.
EURUSD – 1.0662
EURGBP – 0.8750
The markets remain jittery at the start of this week, with the issues with SVB and Signature Bank. With the acquisition of Credit Suisse, the initial reaction was to calm the markets, but the losses from some bondholders could impact other financial institutions as analysts examine banks funding. First Republic in the US was the next bank hit with banking concerns leading its stock to crash.
The disruption in the markets has had a huge impact on interest rate expectations. Just last week, Fed Chair Powell was talking about stronger inflation and further rate hikes, suggesting a 0.5% hike. The interest rate decision this week is now far more uncertain, with some expecting a 0.25% hike, and others suggesting the Fed may hold rates here. Markets are now pricing in rate cuts before the end of the year due to concerns about the impact of the banking disruption.
Fed policymakers will also update the ‘dot plot’ of interest rate expectations. Markets will be keen to see whether policymakers also see rates peaking and potentially falling later this year. Fed Chair Powell’s press conference comments will be particularly important in how concerned the Fed is about recent events. In the meantime, inflation continues to fall (to 6%), with retail sales also weaker in February. There will be further interest this week in housing data along with durable goods orders and PMIs.
GBPUSD – 1.2184
EURUSD – 1.0662
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*Interbank rates correct at 7 am on the date of publishing.
