ECB to hike rates first time in 11 years Blog

GBP – Inflation print and Final two potential Prime Ministers

Following Boris Johnson’s resignation, the Conservative leadership contest will be closely watched.  The party’s MPs are set to decide on the final two candidates by Thursday.  Ahead of that, there are televised debates.  So far the reaction has been limited, though some of the tax cut pledges and talk of the relationship with the EU could shift market expectations. 

Last week, May’s monthly GDP was surprisingly strong at 0.5% growth on the month.  As discussed last week, June GDP is likely to fall due to the shift in working days during the Queen’s Platinum Jubilee. We could still end up with negative GDP growth for the second quarter. Even if we does a fall, the expectations are for a rebound in the third quarter. The Bank of England will be taking note even though their focus is on getting inflation back to the 2% target. Bank of England Governor Bailey will deliver his annual Mansion House address, which will also see a speech from the new Chancellor Zahawi.  

There are a few important pieces of data this week that the Bank of England will take into consideration for its next rate decision.  The labour market report will likely show a new high in unfilled vacancies.  Unemployment is expected to still be at 3.8%, though pay growth may increase to 4.3% from 4.2%.  This would again highlight the tightness of the labour market and may push the MPC to a 50 bps rate hike.  Inflation is expected to have risen again to 9.3%, though the core measure is expected to have fallen slightly to 5.7%. Consumer confidence, Retail sales and PMIs will also add to the overall picture of the economy. 

GBPEUR – 1.1790

GBPUSD – 1.1964

EUR – ECB to raise rates for the first time in 11 years

This week, the ECB is expected to raise interest rates for the first time since 2011. There will be an announcement at 1.15 pm on Thursday, followed by a press conference. Markets expect the ECB to raise rates by 25bps as they have signalled.  The deposit rate will remain negative, moving from -0.5% to -0.25%.  A further hike is expected in the next policy meeting in September, potentially of 50 bps.  The press conference may contain some hints about the ECB’s thinking.

With the looming interest rate hikes leading to a widening of peripheral euro bond spreads, we will be looking for details of the ECB’s new anti-fragmentation policy tool.  This is likely to cover the size of any policy intervention and how it would be deployed.

This week, we expect Eurozone headline inflation to hit 8.6% in June. The June flash PMIs for manufacturing and services are expected to have continued falling to 51.6 and 52.0 respectively.  As with elsewhere, this suggests a further moderation of growth. Eurozone consumer confidence is also expected to highlight weakness with a decline to a record low of -25.  The Euro briefly fell below parity against the dollar on the back of weaker data and a slower-moving central bank.

EURUSD – 1.0147

EURGBP – 0.8482

USD – Fed quiet ahead of rate decision

This week is quieter with no Fed speakers as the central bank is in its quiet period ahead of the policy decision next week. Last week, the Bank of Canada surprised markets with a 100bps rate hike to 2.5%.  This has led to speculation that the Fed may do something similar. Inflation increased to a fresh forty-year high of 9.1%, which will give them something to think about despite slowing activity.

This week, we will see the recent housing starts and permit activity.  We have started to see slowing housing activity, though Retail Sales last week were more positive than expected. We will also see the latest report from the Philadelphia Fed and the flash PMI surveys.

GBPUSD – 1.1964

EURUSD – 1.0147

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*Interbank rates correct at 7 am on the date of publishing.