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Dollar continues run

Last week we saw a move in markets ultimately led by the US Dollar following comments from FOMC Chair Powell. On Thursday, Federal Reserve Chair Jerome Powell reminded markets of the Feds hawkish rhetoric to tame inflations. Investors are now pricing in three 50-basis point hikes at the Federal Open Market Committee (FOMC) meetings in May, June and July. Powell added that further 50-basis point hikes could take place, however this would be considered meeting by meeting.

Compounding Sterling’s woes were comments from Governor Bailey. He stated that the bank is treading a very tight line between taming inflation and heaping greater woe on the economy. According to Bailey, developments in the labour market will be crucial and whether there would be an easing of very tight conditions. Economic data this morning compounded this view as consumer confidence dipped sharply in April with the second-lowest reading on record and retail sales declined 1.4% for March compared with expectations of a 0.3% decline. Despite this a hike is still expected in May. The political backdrop added to the uncertainty as MPs approved the Privileges Committee launching an inquiry. Boris Johnson will be investigated by a Commons committee over claims he misled Parliament. This has increased the odds to him leaving office in 2022 from 33.7% on 20/4 to 49.02% overnight according to Smarkets.

Market to focus on data ahead of BoE meeting next week.

It is a quiet week in terms of economic data from the UK with no scheduled BoE MPC speakers next week ahead of the following week’s policy announcement (5 May). Second tier data will still be looking at t7he signs of the economy’s momentum. The latest April CBI industrial trends (today) and distributive trends (Wed) surveys. In addition, the Lloyds Bank Business Barometer (Fri) which in March showed the biggest fall in business confidence since the early days of the pandemic. The market will be focused on the BoE meeting next week where a hike in rates is priced in, but the focus will be on the rhetoric for some clear signposting on the path of rates moving forward.

Will growth and inflation data support rate outlook?

Given the recent move in the US Dollar, the market will pay particular attention to the data to articulate whether the adjustment in the interest rate outlook is warranted. The first estimate of US Q1 GDP will be released on Thursday with a large slowdown expected to show annualised quarterly growth to 1.3% compared with 6.9% in Q4. In addition, the Fed’s preferred inflation measure, the PCE deflator is due on Friday. This is likely to show elevated inflation reading with the annual headline rate at 6.9% in March. With the FOMC policy meeting scheduled next Wednesday there are no scheduled Fed speakers ahead of the policy update.

Data continued to be scrutinised

Last week, Lagarde stated that policy will depend on incoming data and that it was vital to maintain operational flexibility which had little impact. Today, the German IFO business survey is set for release, overall confidence is likely to have slipped further in April, although the extent to which the expectations component slips will be closely watched. In addition, Eurozone economic confidence report is released on Thursday whilst the flash estimate for April CPI inflation is released on Friday. Inflation is expected to pull back from an elevated 7.4% to circa 6.9%.

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