As expected the Bank of England delivered a rate hike of 0.25% to 0.75%. One of the nine MPC members voted to leave rates unchanged. On a more dovish note, the language softened to “some further modest tightening in monetary policy ‘may be’ appropriate”. Inflation is expected to accelerate to 8% in the near-term, though the minutes noted that it is expected to fall back materially. Overall, the Bank of England may hike less that the market expectations of 125bp of hikes this year.
This week, Chancellor Rishi Sunak’s Spring Statement will be key. There are expectations that Mr Sunak will provide some support given the rise in the cost of living. The Spring Statement takes place with sharply rising inflation and calls for more support to deal with higher energy costs. The Office for Budget Responsibility’s updated economic growth forecasts are likely to be lowered. Inflation will be significantly higher than the OBR’s previous forecast of 4.0%.
CPI inflation figures will no doubt show a further increase in inflation to around 6%. Flash PMIs, GfK consumer confidence and retail sales will add further interest this week. The PMI’s are expected to drop slightly for manufacturing and services, though both will still show strong growth above 57. Consumer confidence is likely to move lower given the cost and inflation situation. This comes despite the strong employment position with unemployment falling to 3.9%.
GBPEUR – 1.1913
GBPUSD – 1.3140
The single currency remains closely tied to the events in Ukraine. Having fallen rapidly since the onset of the war, better news on the peace talk front stabilised the Euro last week. The impact of the war has reduced the chance of rate hikes by the ECB. It is likely to take a settling of the Ukraine situation for inflation expectations to override growth concerns again.
We expect Eurozone flash PMIs for manufacturing and services to fall to 56.0 and 53.5 respectively. This data may provide an indication of the Ukraine war’s impact on input prices and manufacturing supplier delivery times. Business confidence is also expected to have fallen in the German IFO survey. This is particularly the case with Germany’s close energy links with Russia. The headline IFO index is likely to fall to around 94, with a drop in the expectations component.
EURUSD – 1.1039
EURGBP – 0.8394
The Federal reserve increased rates by 25bp as expected. This is the first hike since 2018. The Fed’s decision came along with the ‘dot plot’ projections. These signalled a median expectation of six further 0.25% increases this year. There were also three to four more hikes expected in 2023, which would take rates up to 2.75%. This highlights the Fed’s concern around taming inflation. We also see a difference in the expectations compared to the UK and Euro areas, with some insulation from the situation in Ukraine.
Geopolitics will continue to drive global financial market volatility, as the war in Ukraine enters its fourth week. China has been treading a broadly neutral path, but the West is looking to see whether it is assisting Russia financially or militarily. President Biden is scheduled to attend a NATO emerging summit in Brussels this week.
The US flash PMI is likely to show moderate falls in both manufacturing and services elements, with both around 56. New home sales, durable goods orders and the final reading of the University of Michigan consumer sentiment index will provide some further insight into consumer behaviour as we see costs continue to rise.
GBPUSD – 1.3140
EURUSD – 1.1039
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*Interbank rates correct at 7 am on the date of publishing.
