Last week, as expected, the Bank of England increased rates by 0.25% to 4.25%. This was widely anticipated particularly after the jump higher in inflation to 10.4%. This latest hike is the smallest since June last year, which supports the expectations that rates are close to a peak. The Committee did highlight that there could be further hikes if inflation remains persistently high. The market forecasts are for a further 0.25% rise this year to a peak before rates start to fall.
Financial markets have remained volatile with concerns about banks globally. For the moment, calm seems to have returned with equity markets more stable. Bank of England Governor Bailey testifies to Parliament today about the issues with Silicon Valley Bank. Sterling has had mixed fortunes, generally higher against the dollar, but struggling to gain much against a Euro supported by a more hawkish ECB.
Last week saw a more positive set of data, with consumer confidence and retail sales rising. The March PMI surveys also signalled a return to growth in the UK. Economic prospects are improving but challenges clearly remain. This week, the CBI survey will provide an update on sentiment. The BRC shop price index will give some indications of inflation pressures, whilst the final reading of Q4 GDP will likely show 0% growth in the UK.
GBPEUR – 1.1392
GBPUSD – 1.2315
The Eurozone CPI estimate is likely to drop sharply to 7.4% from 8.5% as a result of a fall in energy prices. The 12% month-on-month surge in energy prices last year was not repeated this year. The core CPI is likely to rise slightly which will keep pressure on the ECB. Markets expect a rise back up to 5/8% from 5.6%. Eurozone unemployment is also expected to remain very low at 6.6% which will keep pressure on the ECB to continue hiking rates in the first half of this year.
The euro has been relatively strong over the past week following the hawkish tone from the ECB after raising rates again by 0.5%. Positive PMIs showing a return of growth will provide a further boost for the currency. The Euro may well continue to outperform as other central banks look more like reaching their peak sooner, including the Fed and BoE along with the Canadian bank which has paused, and the Australian central bank which is expected to do so.
EURUSD – 1.0810
EURGBP – 0.8778
As widely expected the Fed raised interest rates by 0.25% to 4.75-5.00%. A larger hike could have been on the cards but for the banking stresses. The dot plot suggested there may be one more 0.25% hike, which is in line with markets. However, their forecasts don’t show rates falling anytime soon, which is at odds with the market’s pricing of cuts in rates later this year. We would have to see concerted falls in inflation and further escalation of the banking stress to see rates cut in the second half in our view.
This week, we see the PCE deflator released which the Fed follows closely to monitor inflation. The expectations are for a fall back to 5.2%, though the core deflator may increase slightly. Any increase in the core rate will highlight the tricky task facing policymakers. We have several Fed speakers this week who may provide further colour on the Fed’s current thinking around inflation and banking stresses. We will also see the final GDP reading for Q4 last year (expected to show 2.7% growth) along with home sales and consumer sentiment readings.
GBPUSD – 1.2315
EURUSD – 1.0810
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*Interbank rates are correct at 7am on the date of publishing.
