The Bank of England has looked like an exception to the dovish stances taken by the other major central banks. The May Inflation Report signalled gradual rate increases. In contrast, recent comments from US Fed officials could agree on a rate cut as early as the next meeting on 31 July. The ECB, meanwhile, could reduce rates further into negative territory in September. There are now signs that the Bank of England is moving towards a more dovish policy outlook. Governor Carney said last week that whether trade tensions “shipwreck the global economy or are a tempest in a teacup” will have an important influence on UK outlook. MPC members will use next month’s August Inflation Report to make a detailed reassessment of prospects for the economy and monetary policy.
This week, we expect to see a strong rebound in UK May GDP of 0.4%. It fell by the same amount in April, with a fall in car production after an early summer shutdown. Last week, manufacturing PMI fell to 48.0, the lowest since 2013, while services PMI fell to 50.2. For the second quarter, the BoE currently expects GDP growth to be flat. Against the backdrop of rising domestic and international risks, BoE members Silvana Tenreyro, Gertjan Vlieghe and Governor Carney are scheduled to speak this week. On the political front, postal votes for the next Conservative leader take place in the coming next week. Boris Johnson and Jeremy Hunt will take part in a number of events, including a TV debate on Tuesday.
GBPEUR – 1.1158
GBPUSD – 1.2530
The minutes of the ECB’s 6 June policy meeting will be scoured for confirmation that officials are moving towards further stimulus. President Mario Draghi revealed at the press conference that several members raised the possibility of rate cuts and a restart of QE. The ECB may alter its guidance again this month with the possibility of lower rates, setting up a reduction in the deposit rate (currently -0.4%) in September by as much as 20bps.
The possibility of restarting QE has been signalled, though this is less likely. A significant weakening of the growth and inflation outlook would increase the likelihood of more QE by the end of the year or early next year. The current IMF chief Christine Lagarde supported the ECB’s original QE policy, and her nomination to take over at the ECB after Draghi departs in October increases the potential for more QE.
Eurozone industrial production figures for May may show a small rise and would support expectations for overall GDP growth to have weakened in the second quarter. The Eurozone figures will be preceded by national releases including from Germany, France and Italy. Greece held a snap general election over the weekend with the centre-right New Democracy party taking back power from Syriza.
EURUSD – 1.1229
EURGBP – 0.8962
This week’s US highlights are FOMC minutes, inflation figures and Fed Chair Jerome Powell’s testimonies to Congress. Friday’s labour market figures showed a strong rebound in non-farm payrolls of 224,000, from the soft 72,000 increase in May. Wage growth stayed relatively subdued at 3.1%. We do not expect any change to headline CPI inflation at 1.8% and the core measure at 2.0%. These figures suggest inflationary pressures remain well contained.
The FOMC minutes will flesh out the June meeting’s statement which removed the word “patient” regarding policy. This is seen as preparing the ground for a possible rate cut. Powell’s testimony will be closely watched for conviction levels of an imminent loosening of policy. Other speakers include St Louis Fed President James Bullard and New York Fed President John Williams, both of whom are voting members. In light of the strong employment figures, a half-point rate cut at the end of July looks unlikely, but a smaller reduction remains likely. US-China trade talks resume after the meeting of Trump and Xi at the G20
GBPUSD – 1.2530
EURUSD – 1.1229
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*Interbank rates correct as at 7 am on the date of publishing