GBP – Governor Bailey testifies; Pill sees restrictive rates for some time

The outlook for UK interest rates remains in focus, with expectations growing that we are reaching a peak. Bank of England Chief Economist Huw Pill, speaking in Cape Town, suggested that he would like to see a Table Mountain profile.  His suggestion is that the BoE may hold rates at a restrictive level for a longer period of time, rather than a rapid peak and fall in rates.  Mr Pill also reiterated that the MPC will see the job through to return interest rates to 2%, but was conscious that the Bank could do too much, and noted some caution.

If this is the approach taken by the Bank of England, it is likely to have a more gradual effect in bringing down inflation, though it may better sustain economic confidence. Business and consumer confidence remain at high levels and appear to have been boosted by hopes that interest rates may be close to the highs required.  The PMI readings this week suggest that the economy is slowing with both services (49.5) and composite (48.6) coming in below the 50 level which signifies growth.

This week, we will see the BoE’s Decision Maker Panel survey which will give some insight into the latest developments in inflation expectations.  This has been closely watched by policymakers and the previous report showed falls in both 1-year and 3-year inflation expectations.  The Treasury Select Committee meet today and BoE Governor Bailey and Deputy Governor Cunliffe will be testifying.

GBPUSD – 1.2588

GBPEUR – 1.1705


EUR – Inflation remains higher but ECB still expected to pause

Last week, we saw headline inflation stay at 5.3% in August.  Markets were expecting a fall and this may give the ECB further concerns about pausing at the next meeting. Underlying, core inflation did fall slightly and the higher inflation reading was mostly due to energy prices. The ECB is the next Major central bank to hike and is still seen as likely to pause at their 14th September meeting.  Latest survey evidence suggests weaker near-term growth as previous rate hikes continue to feed through to the economy.

We will see the final reading for second quarter GDP growth which may be revised down to 0.2% for the quarter.  Ahead of that, we expect July retail sales to remain soft, along with German industrial production figures.  The final reading of Eurozone services PMI for August is likely to show contraction for the first time this year.  The ECB’s consumer expectations survey showed inflation expectations flat, but economic growth continued to moderate slightly.

EURUSD – 1.0754

EURGBP – 0.8543


USD – Weaker payrolls and higher unemployment suggest rates have peaked

Over the last week, Treasury yields have fallen significantly in the past week.  Weaker data has led markets to expect larger Fed rate cuts next year. The latest JOLTS job openings data gave further evidence that labour demand is cooling. The number of available job positions eased to 8.83m in July from 9.17m.  This is six falls so far this year.  Consumer confidence also fell sharply in August and second-quarter GDP growth was revised lower. Meanwhile, the monthly labour market report showed an unexpected jump in the unemployment rate to 3.8% from 3.5%.  Wage growth was also weaker than expected.

This week, we have durable goods orders, with the ISM services and Fed Beige book today.  The focus now turns to Fed speakers based on what they expect to happen with rates, particularly given some of the weaker recent data.  The Reserve Bank of Australia held rates at  4.1%, yesterday and the Bank of Canada is expected to leave policy rates unchanged at 5%.

GBPUSD – 1.2588

GBPEUR – 1.1705


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