The labour market data today was an important update on inflationary pressures. Regular pay growth rose by more than expected at 7.3% in the three months to May. Employment growth fell and unemployment rose from 3.8% to 4%, though this may be due to economically inactive people returning to the workforce. The stronger report last month likely influences the BoE to hike interest rates by 0.5% and this report will add further pressure. Sterling is close to highs for the year on the back of higher rate expectations.
May GDP comes out later this week but will be distorted by the impact of the extra day of holiday for the King’s Coronation. Markets forecast a decline of 0.4% for the month. Much of that fall may be made back up in the June figures. Overall, the indications are that the private sector activity is stronger than markets expected at the start of the year.
BoE Governor Bailey is due to speak several times this week. It will be interesting to see whether he comments on market expectations that interest rates could hit 6.5%. One of the appearances follows the release of the latest Financial Stability Report. He may comment about the impact of higher rates, particularly on the housing market and fixed-rate mortgages roll over at much higher interest rates.
GBPEUR – 1.1692
GBPUSD – 1.2869
This week, the German ZEW survey will give an indication of economic trends in July. Eurozone industrial production for May is expected to show that the factory sector is still struggling. The impact of previous rate hikes does appear to have fed through into the European economy and will no doubt be taken into account by the ECB.
The European Central Bank will release the minutes of its June policy meeting when it raised rates to their highest for 22 years. These minutes are likely to confirm that there will be more tightening ahead, despite signs of weakness in the economy. Markets expect a further hike in July, but beyond that further hikes seem less certain at the moment.
EURUSD – 1.1006
EURGBP – 0.8553
The release of hawkish minutes for the US Federal Reserve policy meeting raised concerns over further rate hikes. Last month’s pause in rate hikes is likely to be very short, with a hike now expected in July. Although non-farm payrolls were weaker than expected, a fall in the unemployment rate and stronger wage growth maintain concerns about inflationary pressures.
Treasury bond yields rose sharply with 2-year yields hitting a 16-year high. Markets expect one more hike in July and potentially a further 0.25% hike in the autumn. What has changed is how soon the markets expect the Fed to start cutting rates, with the dates for that being pushed out.
This week, June CPI inflation is expected to show a further fall in annual headline inflation to 3.2%. The Fed is expecting this drop which is mostly due to energy prices. Core inflation is likely to remain above 5% and the stickiness of this remains the main concern of the Fed.
GBPUSD – 1.2869
EURUSD – 1.1006
Do get in touch if you would like to discuss this further.
*Interbank rates are correct at 7am on the date of publishing.
