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BoE start aggressive talk whilst Fed take aggressive action

Last week, we continued to see Sterling under pressure, sliding for the third consecutive week in a row. The main focus of the market was the interest rate decision, which disappointed initially only raising interest rates by 25 basis points to 1.25%. This was the fifth successive increase and the highest rate since early 2009. There was again a 6-3 vote as Haskel, Mann and Saunders voted for a 50 basis-point increase.

Inflation likely to be above 11% later in 2022 as energy prices increase again

The bank downgraded the growth outlook, stating that it would be forceful in combatting inflation. Sterling pushed higher initially on the back of these comments with money markets raising their prediction for where interest rates will be at the end of the year. There is now a greater than 90% probability that interest rates will be at 3% by the end of the year with a probability of a 50-basis point hike at the next meeting in August is currently greater than 60%.

Federal Reserve opted to raise US interest rates by 75 basis points

This was the largest single hike by the US Central bank for nearly 30 years. Investors had priced in a 50-basis point, however, following the higher-than-expected May CPI inflation figures speculation increased surrounding a more aggressive hike. In the accompanying statement Fed Chair, Jay Powell cited growing concerns about upside inflation risks, commenting that policymakers are prioritising a normalisation of US inflation levels above other factors such as downside risks to growth.

Finally, ECB officials continued to prop up the currency with further hawkish rhetoric. ECB member Knot stated that it was a real possibility that rate hikes will continue in October and December. He noted that if conditions remain as they are now, the bank will need to hike more than 25 basis points in September. He added that he would be comfortable with hiking rates to 1.50%.

UK – Economic data and political risks due

The BoE noted that they would be forceful in combatting inflation. The release of the UK CPI data for May will provide further evidence on the extent of near-term inflationary pressures. Inflation is expected to rise to 9.1% on Wednesday; if we see this overshoot this reading, calls for aggressive action may become more prevalent.

Following this on Thursday, key economic activity figures are due for release in the form of the PMI manufacturing and service sector data. The market will focus on the pace of expansion given the slowing of momentum in the last few months. The retail sales figures are set to highlight further concerns in the sector with the headline figure set to decline by 0.6%; heightening concerns of a recession.

On the political front, on Thursday, we have the by-elections for Wakefield and for Honiton and Tiverton, both currently held by the Conservatives. Tory MPs have warned that a double by-election defeat will pile further pressure on Boris Johnson’s leadership as the embattled Prime Minister tries to move on from the Partygate scandal.

According to Smarkets, the odds for Wakefield is a 98% Labour victory and for Tiverton and Honiton is around a 78% probability of a Liberal Democrats’ win.

US = Markets to look for more clarity in semi-annual testimonies

Looking ahead to this week, it’s a quieter economic calendar as the focus will surround central bank policy commentary. The standout event will be Fed Chair Jay Powell’s semi-annual testimonies to Congress, scheduled on Wednesday and Thursday. Powell will offer further commentary on the Fed’s balancing of tackling inflation and the implication of higher interest rates on economic growth. Key economic data releases scheduled include existing home sales on Tuesday, followed by Manufacturing and Services PMI data set for release on Thursday.

EZ = Will ECB follow BoE and FOMC suite?

On Monday, the market will focus on the comments from ECB President Christine Lagarde as she speaks at two engagements. Following the 75 basis point hike from the US and the more aggressive rhetoric from the UK’s central bank, the market will keep a close eye to see if Lagarde drops any hints that ECB could follow suit.

In the meantime, Thursday’s flash PMI manufacturing and service sector data will be watched to understand the growth prospect of the region. Friday’s German IFO will provide the market with further insight into the blue collar’s view on the sentiment moving forward.

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