Bank of England policymakers testified on the inflation report before the Treasury Committee on Wednesday. They reinforced expectations around monetary policy that UK rates will rise further but offered little guidance on timing. UK employment growth was weaker than expected in the fourth quarter, but wage growth accelerated modestly. The final readings for GDP and employment growth were slightly lower than expected, as were industrial and retail CBI surveys. As a result, while there is a significant chance of a UK rate hike in May, the probability is a lower than a week ago.
The week ahead is relatively quiet for UK economic data. The February GFK consumer confidence index and the manufacturing and construction PMIs provide updates on the economy. Mark Carney will speak at a conference in Scotland. MPC member Jon Cunliffe provides his latest thoughts after voting against last November’s rate rise. Brexit speculation will continue this week as Prime Minister May is due to set out her cabinet’s strategy for Brexit on Friday. Opposition leader Jeremy Corbyn is expected to put forward the Labour position recommending staying in the ‘customs union’.
GBPEUR – 1.1396
GBPUSD – 1.4046
Eurozone CPI inflation eased for a second month in January to 1.3%, driven mainly by energy prices. Core inflation, which excludes food and energy, in contrast edged up to 1.0% from 0.9%. The ECB describes domestic inflation pressures as “muted”. The debate continues about the expected outcome of the next European Central Bank meeting on March 8th. The ECB may update the forward guidance on monetary policy after the asset purchase programme runs out in September.
We see the initial reading for February inflation this week, which may help the case for a cautious approach. We expect the CPI inflation to slip to 1.2% with core inflation unchanged at 1.0%. This remains below the ECB’s inflation target of close to 2%. ECB President Draghi will address the European Parliament, where he may provide some hints on the policy outlook.
EURUSD – 1.2325
EURGBP – 0.8775
The US monetary policy meeting minutes suggest an increase in the pace of further rate hikes. As a result, the yield on 10-year US Treasuries was up slightly at 2.90%. The key data for the week is consumer spending and GDP. The general expectation is for economic growth to continue to rise, though first-quarter growth has been lower in previous years. The ISM manufacturing survey is expected to show buoyant activity in the sector.
This week new Fed Chairman Powell will make his first significant public appearance, testifying to Congress, since succeeding Janet Yellen. The semi-annual briefings are always seen as notable events. However, this week’s is of particular note, because Powell is new to the role but also because of uncertainty about the Fed’s policy intentions. The US central bank has suggested for some time they will raise interest rates three times this year. This week’s testimony gives Powell the opportunity to manage expectations ahead of the next policy meeting. The Fed is expected to raise rates by 0.25% on 21st March.
GBPUSD – 1.4046
EURUSD – 1.2325
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