UK Rate decision & US data to bring volatility to end the week
Today sees the UK Monetary Policy Committee announce its latest interest rate decision, alongside the latest Minutes, summary and speeches.
All economists expect an interest rate rise – it is the magnitude of the rise where there remains a question mark. A rise is justified by the data - U.K. inflation hit a new 40-year high of 9.4% in June as food and energy prices continued to soar, deepening the country’s historic cost-of-living crisis.
If the MPC increase rates by 0.5%, would take borrowing costs to 1.75% as the central bank battles soaring inflation and would be the first half-point hike since it was made independent from the British government in 1997. 70% of economists expect this to be the case.
The MPC can afford to raise by 0.5% - why? They have signalled ‘the chance’ of such a move in 2 speeches (notably the Governor’s speech on 15th July). They also have solid data that domestic and global inflation is rampant – an upside surprise will not shock markets too much, nor will it be a huge surprise to the UK public. These 2 circumstances set the backdrop for the MPC to push forward with a 50% with solid justification and bring the UK closer to its counterparts in the US and Europe who have aggressively raised rates recently.
Another reason for moving ‘sooner rather than later’ is well put by James Smith, economist at ING:
“ …. the window for further rate hikes feels like it’s closing. Markets have already pared back expectations for ‘peak’ Bank Rate from 3.5% to 2.9%, though that still implies two further 50bp rate hikes by December, plus a little more thereafter …” Smith said.
Where next for GBP?
GBP/ EUR is trading at 1mth and 3mth highs, looking stable at a level over 1.1900 (also due to EUR weakness). With a 50bp rise almost fully priced into the market, we expect GBP/EUR to settle around the 1.1800 / 1.1900 level.
GBP/USD is trading close to the highest level in the last 6wks .. above 1.2100 .. which is far stronger than the 1.1800 levels in mid-July. However, because of USD strength, we do not expect to see the May peak around 1.2700 for a while. If the MPC delivers 0.5% rise today, a knee-jerk reaction above 1.2200 / 1.2250 might be worth taking advantage of.
Tomorrow is just as important!
Tomorrow sees the monthly release of US Non-Farm employment data, with the US economy expected to add 250k jobs. With data suggesting that the US is in / approaching recession, a weak number tomorrow would hurt the USD. This monthly data is closely watched – analysts at JP Morgan are suggesting the data will be weak, adding to fears that US economic strength is fading.
If the data is weak, then the USD will sell-off and GBP/USD has the chance to rise – possibly to the upper end of our expectation near the 1.2300 levels.