Attention turns to MPC policy announcement

Following a shortened week for the UK with the extended Jubilee bank holiday, economic data last week was light meaning investors’ focus switched to political pressures on the Prime Minister. PM Johnson appeared to be clinging to his premiership on Monday night after 148 of his MPs voted to oust him from Downing Street in a ballot that exposed potentially fatal rifts within his party. The prime minister won the support of 211 MPs but 41% of his party voted to remove him.

Early data released on Monday showed that UK GDP contracted by 0.3% on a monthly basis in April, missing the market expectation for an expansion of 0.2%. Looking to the week ahead, investors will be paying close attention to the Bank of England interest rate meeting on Thursday. We have heard very little from the BoE over recent weeks, questioning whether there is to be a rude awakening on the BoE rate profile when the Bank announces rates next Thursday. Sterling Money Markets continue to price in a further 175-basis point of Bank of England (BoE) tightening by year-end which goes to show that investors are hesitant to buy into the idea of a pause in tightening. The Central Bank’s Monetary Policy Committee is expected to increase interest rates for a fifth consecutive meeting by 25-basis points, raising rates to 1.25%. It’s likely, as we have seen at recent meetings that there will be a vote split amount the policymakers, highlighting differing views on the balance of inflation and growth risks.

Ahead of the MPC report, investors will review April’s GDP data which is expected to post a rebound of 0.2%.

ECB signal a lift-off in rates in July

The standout event last week saw a mixed performance from the Euro as the European Central Bank on Thursday confirmed its intention to hike interest rates at the policy meeting next month while downgrading its growth forecasts. Following the latest monetary policy meeting, the Governing Council announced it intends to raise key interest rates by 25-basis points at the July meeting. The ECB expects a further hike at the September meeting; however, policymakers have recently commented that the scale of that increment would depend on the evolving trajectory of the medium-term inflation outlook. Additionally, the central bank upwardly revised the annual inflation forecast, now seen at 6.8% for this year, then decreasing to 3.5% in 2023 and to 2.1% in 2024. On the other hand, growth has been slashed to 2.8% in 2022 and 2.1% for the next two years. During the meeting ECB President Christine Lagarde failed to commit to pre-set tightening course, advocating for complete flexibility and optionality, a sign that policymakers may not be fully sold on the idea of aggressive adjustments in the fall or later, amid growing fragmentation headwinds and rapidly slowing economic growth.

Looking ahead to this week it’s a light European economic calendar with the focus switching to the Bank of England and Federal Reserve policy updates.

Inflation hit highest levels since 1981

It was a quieter week last week on the US economic calendar and following on from the previous week’s jobs data. The Greenback however ended the week stronger against the Pound and Euro, underpinned by safe-haven flows, which saw US Treasury yields climbing towards new highs and a better-than-expected annual inflation reading. The annual pace of inflation in the US rose to 8.6% in May according to the latest Consumer Price Index released by the US Bureau of Labour. 

Looking to the week ahead in the US, Retail sales figures will draw attention ahead of the FOMC meeting on Wednesday. Fed policymakers appear set to add to the recent tone of aggressive tightening moves by central banks. A 50- basis point rise is being priced in for the second month in a row with a repeat of previous hawkish guidance that rates may increase by another 50-basis points in July. However, there will be a focus on the accompanying statements from Fed Chair Jay Powell about what the Fed sees is likely to happen later in the year. Elsewhere, Industrial production numbers towards the end of the week are forecasted to show that overall growth conditions remain robust.

Meanwhile, Housing starts due for release on Thursday and may weigh on the Dollar if there are signs of a negative impact from rising interest rates.

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