This week, the focus shifts to the Bank of England (BoE) rate decision tomorrow, following the Fed and ECB updates last week. This meeting will be followed by a press conference with Governor Bailey. Markets expect a 0.25% hike to 4.5%, following a similar path to the ECB and Fed. That will make it twelve hikes in a row since December 2021, when the base rate was 0.15%. The BoE will likely be focused on inflation which remains stubbornly high, with headline inflation above 10% in March. Core inflation has also remained sticky at 6.2% with wage data remaining strong. The wider economy is also performing better than predicted, services PMI revised higher and a contraction looking less likely in the first quarter.
We will also have updated economic forecasts from the BoE on medium-term growth and inflation. This may give some indication of their current interest rate expectations. In February, the Bank predicted a technical recession with the economy contracting in each quarter. It now appears that the first quarter will show modest growth on Friday of 0.1%. This would be the same as the previous quarter. It also looks like we will have a more positive start to the second quarter.
With the fiscal measures from the March Budget likely to boost the economy, we expect the Bank of England to improve its forecasts. Lower energy prices will also support the economy. Overall, this may mean that the Bank raises its medium-term inflation expectations. This could support further rate hikes at a time when the Fed looks likely to pause. The longer-term forecast for 2024/25 will be of interest to show whether the Bank still expects inflation to fall below 2%.
GBPEUR – 1.1506
GBPUSD – 1.2619
Following the decision by the Fed last week, the European Central Bank raised its deposit facility rate to 3.25%. This 0.25% hike was the smallest in the current tightening cycle. The ECB noted that previous hikes are being forcefully transmitted through to the wider economy. This is expected to reduce economic activity and inflationary pressures. However, President Lagarde was keen to point out that the ECB is not pausing as inflation has remained too high for too long. This suggests that we will have another 0.25% hike at the next meeting in June.
This week is fairly quiet after the ECB decision, inflation, and employment figures from last week. Inflation for April moved higher again to 7% with unemployment falling to a new low of 6.5%. The Norges Bank stayed in step with the ECB, raising rates by 0.25% to 3.25% and hinting at more to come.
EURUSD – 1.0967
EURGBP – 0.8691
The main event last week was the Federal Reserve rate decision. As widely expected, the Fed raised interest rates by 0.25% to 5.00-5.25%. The committee did, however, signal that it may pause to consider the impact of this round of rate hikes. Since they started raising rates last year, they have increased by 5%. This is not a certain peak in rates, which the Fed still adopting a wait-and-see approach, but the markets are pricing in the next move being a cut in rates later this year.
The markets generally remained volatile, with renewed concerns about US regional banks. The labour data was better than expected with unemployment dropping back down to 3.4% whilst nonfarm payrolls rose by 253k and wage growth was stronger than forecast at 4.4%. With concerns about regional banks and lower Treasury yields, we have seen a broadly weaker dollar.
This week, the focus is on the April inflation data. Headline CPI has fallen for nine months in a row, but is expected to remain at 5% this time with higher energy costs. The downtrend in inflation is likely to continue next month before the next Fed meeting in June.
GBPUSD – 1.2619
EURUSD – 1.0967
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*Interbank rates are correct at 7am on the date of publishing.