Following the rate hike by the Bank of England, markets anticipate Bank Rate at 6% by the year-end. Despite the expectations for rates staying higher for longer, the pound has weakened over the last couple of weeks. This is a reflection of concerns about the outlook for economic growth. For the moment, the economy has not slowed as much as expected due to the rate hikes, with the GfK consumer confidence remaining strong.
At last week’s ECB forum, Bank of England Governor Bailey was noncommittal over higher interest rates. Bailey did indicate that rates could stay at the peak for longer than markets expect due to inflation pressures. This comes even though the British Retail Consortium reported a fall in shop price inflation, including lower food inflation.
This week, the Decision Maker Panel survey will be closely looked at by policymakers. The report’s findings on firms’ pricing behaviour and inflation expectations will guide the BoE on future moves. Services inflation seems to be one of the key factors that caused the BoE to hike by 0.5% last week. The final readings of the June manufacturing and services PMIs will be released, along with the construction PMI report. Manufacturing was weak, whilst Services showed solid growth in the flash estimates.
GBPEUR – 1.1641
GBPUSD – 1.2692
The theme of ‘higher for longer’ interest rates was also expressed ECB President Lagarde reiterated that policy rates will likely rise further. President Lagarde also noted that rates will have to rise further. This came as the latest Eurozone CPI inflation showed a decline to 5.5%. However, the core rate picked up and is showing more stickiness.
This week, we will see German May industrial production which has been weak for the last couple of readings. Evidence from the German IFO and the PMI surveys suggested a slowdown in manufacturing activity. The final readings of the Eurozone PMI are expected to show a similar picture to the UK, with slower manufacturing and services continuing to grow.
EURUSD – 1.0903
EURGBP – 0.8590
At the ECB forum, Fed Chair Powell reiterated that policy rates will likely rise further. On the back of this, markets will be watching data releases to decide whether rates will rise again at the end of this month after the pause in June. It seems likely that the Fed will hike by 0.25% in July unless it sees compelling reasons not to from the data. We will see the Fed minutes from the ‘pause’ meeting this week and may gain some insight into why the Fed decided on a short pause.
The labour market report at the end of this week will be key. We expect to see that the US economy added 220,000 jobs in June. This would be a fall from the 339,000 added in May but still represents strong growth. The unemployment rate may fall further, to 3.6%. The average hourly earnings will also be closely watched. A rise of only 0.3% for the month would see the annual rate fall to 4.2%.
The ISM surveys have been showing stronger activity in services than in manufacturing. This mirrors what we have seen in the UK and Europe, with manufacturing showing contraction, whilst services continue to show growth. Growth in the US remains steady with first-quarter growth at 1.4% annually, with consumer confidence remaining strong.
GBPUSD – 1.2692
EURUSD – 1.0903
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*Interbank rates are correct at 7am on the date of publishing.