This week, attention will be on sterling with the Bank of England rate decision on Thursday. Pretty much everyone expects a further 0.25% rate hike to 4.75%. That will make it 13 in a row. The BoE are still clearly concerned about persistent inflation. Markets are pricing in further rate hikes after this one.
Inflation figures will be released the day before the Bank of England announcement. We expect it to fall slightly to 8.6% in May from 8.7% in April. This remains higher than Europe or the US and is falling slower after a higher peak. This could lead to further rate hikes in the UK than in the US or Europe and could support sterling. We may also see core inflation rise again to 6.9%, which would make a new high and will be a concern for the BoE.
Last week, we saw some very tight labour market data, suggesting that average earnings continue to push higher, whilst employment growth remains strong. The wider economy has also shown resilience against a challenging backdrop. We saw a return to growth in April with GDP rising by 0.2%. This was supported by consumer services and comes despite disruption from strikes. The latest PMI reports will be closely watched for activity in June, expected to show rising activity. Consumer confidence and retail sales will add further colour to the economic picture.
GBPEUR – 1.1721
GBPUSD – 1.2822
The European Central Bank raised interest rates by 0.25% again with the deposit rate now at 3.5%. That marks the eighth increase in a row. President Lagarde reiterated that there is still ground to cover. The ECB is certainly not in the mood to pause at the moment, with economic forecasts showing higher underlying inflation pressures. The ECB signalled that it is highly likely to raise rates again at the next meeting in July. The euro gained against the dollar as a result.
This week, we will get an indication of economic activity, with the flash PMI report on Friday. We expect manufacturing and services PMIs to continue to weaken further, with manufacturing well below growth territory, around 44.
Elsewhere, the Norges Bank and Swiss National Bank are both expected to raise rates this week by 0.25%. By contrast, the Bank of Japan left short-term interest rates at -0.1% last week, whilst maintaining its yield curve control policy. China’s central bank also cut its one-year medium-term lending rate to 2.65% as authorities try to support economic growth. It should be noted that Japan and China have much lower inflation than Europe, the UK and US.
EURUSD – 1.0939
EURGBP – 0.8532
The Federal Reserve left its policy rates unchanged at the 5.00-5.25% range last week. This is the first time the Fed hasn’t hiked since it started raising rates last March. The Fed signalled that this is just a pause, rather than the end of the present round of hikes. In fact, it may just be a skip if they raise rates again next time. The majority of the Committee thinks that another two 0.25% hikes may be needed this year.
Given this skip in hiking rates, the Fed and therefore the markets will be watching upcoming data trends closely. Fed Chair Powell testifies to Congress this week and his comments will also be closely watched. He may provide further colour on the Fed’s rate hike skip. He may also explain what the Fed needs to see to if we are going to see the dot plot being correct with projections of 0.5% of further hikes this year.
This week, we have seen housing starts and will get weekly jobless claims and the flash PMIs. Initial jobless claims have been higher than forecasts recently suggesting that the labour market may be softening.
GBPUSD – 1.2822
EURUSD – 1.0939
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*Interbank rates are correct at 7am on the date of publishing.
