This week, we will see the results of the BoE decision-makers panel. This is a survey of the views of businesses and the results will likely have an impact on the Monetary Policy Committee’s August decision. The MPC will be looking for signs of inflation pressures easing and expectations being anchored. In May, the survey showed the expectation that inflationary pressures would ease before year-end but overall remain elevated. Recruitment difficulties remained widespread with business uncertainty still high.
The Bank of England’s view remains more cautious than most other central banks. They have more focus on the need to balance growth and inflation risks. Comments from BoE Governor Bailey noted his concerns about both and once again suggested that market interest rate hiking expectations may be excessive. However, that seemed to have little impact as markets still expect the BoE to hike rates again, and possibly by 50bp, at its next update on 4th August with further significant tightening seen as likely before year-end.
This week, we will see the latest PMI readings for services and construction. They have both been showing a slowdown in activity and are expected to continue to show further slowing particularly in the services reading. Several BoE policymakers are also set to speak this week, though they have been reluctant to issue strong guidance. Some are also set to talk about matters other than the immediate interest rate outlook.
GBPEUR – 1.1599
GBPUSD – 1.2101
The minutes of the latest ECB decision is due this week. They are expected to reflect the guidance given that interest rates are likely to rise by 25bp in July. The guidance suggested that rates may be increased by 50bp in September. This week, there will be interest in whether a 50bps increase in September is possible and what may determine the size of this move. The ECB has also promised a new tool to combat bond yield spreads widening within the Eurozone. It may be too early to see any information on this in the minutes.
Last week, we saw Eurozone inflation hit 8.6% in June, from 8.1% in May. Although the core rate fell from 3.8% to 3.7%, there will still be concerns within the ECB. The Australian central bank will give its latest update this week with a third successive rate hike expected. This will likely be the first of a number of central bank rate increases in July. The European Central Bank is forecast to initiate the first of a series of hikes later in the month. Eurozone services PMI and retail sales will also be released this week.
EURUSD – 1.0433
EURGBP – 0.8622
The minutes of the latest Fed meeting are also released this week and may give an indication of their future action. The key question is why policymakers pushed further to raise rates by 75bps rather than 50bps. They had signalled a 50bps hike in June and July, so are we likely to see 75bps again in July? Fed Chair Powell has cited concerns about rising longer-term inflation expectations. One survey that initially pointed to higher consumer price expectations has now been revised down, with the Fed’s preferred inflation measure static at 6.3% for May. The minutes are expected to be ‘hawkish’ with the potential of further aggressive tightening.
The labour market report is seen by markets as an important gauge of economic conditions. Fed policymakers have stressed that the tight labour market is reinforcing their concerns about inflation. The labour market clearly remains buoyant, from the monthly reports, though in recent weekly unemployment benefit claims suggest it may be turning. Markets expect weaker growth for May, though there will likely still be a solid increase in employed numbers and a further small decline in unemployment. The earnings growth will be watched closely to see whether wage growth is slowing following the recent rate hikes. We will also see Factory orders and ISM services this week after consumer spending fell in May.
GBPUSD – 1.2101
EURUSD – 1.0433
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*Interbank rates correct at 7 am on the date of publishing.