RedFX Snap: Big week ahead for GBP
We saw the US Fed pause its rate hiking cycle last week and then assure the markets that around 2 more hikes can be expected in 2023. The ECB also raised rates and indicated they will be closely watching data and are prepared to keep raising rates. The EURO strengthened further on this news, taking EUR/USD through the key 1.0900 level.
This week it is the UK’s turn to indicate how many more hikes will follow. The market is convinced that Thursday will see an interest rate hike, but the extent of the hike (0.25% or 0.5%) is in question, alongside how many more hikes are expected. GBP/USD rose 2% through last week and GBP/EUR remains at the highest level since December 2022.
GBP: Société General summarise things perfectly:
The acceleration in UK core inflation to a new high of 6.8% in May and wages ex-bonuses to 7.2% YoY in April sparked a dramatic repricing of the implied BoE terminal rate in the past two weeks from 5% to 6%. Whether we ultimately get there remains to be seen, but the bank could double down in the statement that tighter policy is required to rein in second-round effects. Compared to the UK, core inflation in the Eurozone and the US is 5.3%.
Will this bring more strength to GBP and perhaps push GBP/USD closer to 1.3000 and GBP/EUR to 1.1800? Key inflation data (Wednesday) this week will be very closely watched, alongside the Bank of England statement on Thursday. With UK food inflation at a 45yr high (19%) and rates expected to hit a 15yr high of 4.75% this Thursday, the Bank of England has a tough job ahead and the Chancellor has ruled out direct fiscal help to households due to fear of fuelling more inflation.
USA: The USD has held steady, despite NOT raising rates last week, and the peak in US rates seems to be close – they will be closely watching data from now on. Fed Bank President Thomas Barkin has commented that raising rates further could create the risk of a more significant slowdown in the economy. It will be comfortable doing more on interest rates if incoming data doesn't confirm a story that slowing demand is returning inflation to the 2% target.
EU: (ECB) policymaker Peter Kazimir said on Monday, “we need to raise rates again in July.” And added:
“Upward inflation risks are still substantial, linked to the labour market, food prices, profit margins.”
“Regarding Sept, I'm awaiting analysis of the cumulative impact of past ECB measures.“
This maintained EUR/USD above 1.0900 in slow trading today due to the US holiday.
Main Events this week:
· Tuesday: China Interest Rate decision / Australia Central Bank minutes released
· Wednesday: UK Inflation data / UK Retail Sales / US Fed Chairman speaking / CAD Retail Sales
· Thursday: UK Interest Rate Decision, press conference / Swiss Interest rate decision / US Fed Chairman speaking
· Friday: UK Retail Sales / UK Services data / EUR Purchasing Managers Index / US Fed speakers
Other news:
