We now have two weeks to wait until the next Bank of England rate decision on 22nd June. The data will be closely watched in the run-up to that decision which may see a pause in rate hikes. Tomorrow we will get the labour market report which is expected to show solid employment growth of around 220,000 jobs in the three months to April. Unemployment may also move slightly higher with people coming back into the labour force. The key for the Bank of England will be wage pressure, which is likely to continue to rise with weekly earnings growth potentially rising as high as 7%.
On Wednesday, we will get the latest growth figures. Markets expect GDP to have risen 0.3% in April, with services activity rebounding following a wet March. Overall, the Bank of England has forecast underlying growth of 0.2% in the first half of the year. The economy overall is holding up better than was expected a few months ago. Inflation has continued to come in higher than expected, falling more slowly, which will add to pressure on the Bank of England. Industrial production figures this week are likely to show a fall, with more challenging global conditions.
Last week, the more promising data continued, with May services PMI revised up to 55.2 and construction PMI increasing to 51.6. Both show solid expansion and overall, we may see the Bank of England raise its growth forecasts further.
GBPEUR – 1.1698
GBPUSD – 1.2574
This week, all eyes will be on the European Central Bank which is expected to increase rates by a further 0.25% on Thursday. This will leave the deposit facility rate at 3.5%, compared to -0.5% a year ago. ECB President Lagarde has said that there is more to do to bring inflation lower. Although revised data showed that the Eurozone economy was effectively in a mild recession over the winter, the ECB remains focused on inflation levels. Headline inflation has fallen back to 6.1% in May, though core inflation remains sticky at 5.3%. Both measures remain uncomfortably high compared to the ECB’s 2% inflation target.
With the 0.25% hike almost a certainty, the key focus will be what happens in July and beyond. The post-meeting press conference with President Lagarde’s comments will be closely watched. The ECB has said that policy will be guided by three criteria: incoming data, underlying inflation dynamics, and how strongly policy decisions feed through to the economy. The new economic forecasts may show inflation above their target until 2025. This suggests that a June hike may well not be the last.
EURUSD – 1.0749
EURGBP – 0.8548
Although the Federal Reserve is expected to pause after ten hikes in a row (to 5.00-5.25%), this may not be the peak. The yields for US (and UK and EU) treasuries moved higher last week as the Bank of Canada (4.75%) and Reserve Bank of Australia (4.1%) both surprised markets with further hikes. These hikes were notable as both central banks had paused their hiking cycles before resuming this month. The Fed tends not to surprise markets, so the expectation is that we will have a pause this month, with a message in the press conference that further hikes may be needed. The dot plot will likely show further expected hikes in the second half of the year. The press conference will also be closely watched to give an idea of Fed thinking about further hikes.
Recent data have been mixed with monthly payroll data underlining a solid labour market, though other data suggests the previous interest rate hikes are feeding through. ISM services fell to 50.3 in May and weekly jobless claims jumped higher to 261,000.
May CPI inflation is expected to show a fall to 4.3% from 4.9% with the core rate falling slightly to 5.3% from 5.5%. Retail sales, industrial production and the University of Michigan consumer sentiment will all be released after the Fed policy announcement.
GBPUSD – 1.2574
EURUSD – 1.0749
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*Interbank rates are correct at 7am on the date of publishing.
