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Sterling remains fragile ahead of growth data

Sterling fell to its lowest level since Q220 against the US Dollar and a fresh 5 month low against the single currency following the central bank meeting last week. In the meantime, Sterling remains fragile amidst the “cost of living crisis” and political uncertainty.

The US Federal Reserve monetary policy update produced a second successive interest rate hike. Moreover, this time the rise was 50 basis points rather than the 25bp move seen in March. Chairman Powell suggested that they might make the same move again at the next meeting in June and the following one in July. Powell’s comments pointed to lots of concerns about upside inflation risks arising not only from international developments such as high commodity prices and supply chain constraints but also domestic pressures particularly from a ‘red hot’ labour market. Downside risks for economic growth were also acknowledged but these were given much less prominence.

The Bank of England (BoE) meeting was a lot more cautious whilst raising for a fourth consecutive time by 25 basis points. The Bank reiterated that most (but not all) members judged that some further policy tightening ‘might’ still be appropriate, but not as much as markets have priced in. Bailey warned that inflation is now expected to hit 10% towards the end of the year. While the economy is expected to expand by 3.75% this year, UK gross domestic product (GDP) is forecast by the MPC to fall 0.25% next year before rebounding in 2024.

In the meantime, economic data took a bit of a back seat. The all-important US jobs data was released on Friday showing that non-farm payrolls grew by 428,000 for the month, a bit above the Dow Jones estimate of 400,000. The unemployment rate was 3.6%, slightly higher than the estimate for 3.5%. The April total was identical to the downwardly revised count for March.

Will Q1 GDP confirm UK slowdown?

Sterling remains fragile following last week’s move. Tomorrow sees the Queen’s speech at the opening of parliament. Political commentators have been discussing the risk that, after a poor showing in local elections, the UK government will look to push ahead with a legislative agenda that could be more combative on Northern Ireland trade. On Thursday, 1Q22 GDP is set for release which may start to show the slowdown emerging in March, ahead of what could be a negative quarterly reading in 2Q22 given the removal of the energy cap in April. In the meantime, the market will continue to keep a close eye on BoE speakers for clues on future policy. Currently the market still prices the Bank Rate at 2.15% by the end of the year down from circa 2.25%, but this remains delicate.

Subdued sentiment supports the Dollar ahead of Inflation report

Risk-averse market conditions helped to support the Dollar last week, which saw the US Dollar Index hit its highest level since November 2002 above 104.00. The standout event last week saw all eyes on the Federal Reserve. The central bank announced a lifting of the benchmark lending rates 50-basis points. The initial market reaction suggested the announcement had been considered a dovish hike as Fed Chair Jerome Powell dampened recent speculation over a 75-basis point rate hike that investors had been speculating over in the months ahead.  Meanwhile, a strong jobs report on Friday reinforced investors bets on further large hikes this year.

Looking ahead to this week, the highlight on the economic calendar will be the next US inflation report on May 11th. Headline inflation is expected to reduce to 8.1% year-on-year in April from 8.5% prior. The Core Consumer Price Index (CPI) reading is expected at 6.1%, down from the previous reading of 6.5%. While this would represent some disinflation, it remains far above the Fed’s target inflation rate. A reading above consensus forecasts could see a further surge in US Dollar and intensify risk aversion. Elsewhere, we look forward to several comments from several Fed speakers due this week. Fed officials Mester, Bostic Williams are scheduled to speak and will provide fresh updates following the Fed announcement last week over the timing and pace of hikes.

Markets to watch rhetoric for further clues of rates

Last week we saw comments from several policymakers suggesting it is close to raising interest rates, especially with Eurozone annual CPI inflation at an all-time high of 7.5% in April and despite economic headwinds. Recent rhetoric is shifting towards a first hike as soon as July’s meeting. The next European Central Bank (ECB) meeting on 9 June is when policymakers could signal the end of QE in early July and the possibility of a hike soon after. As a result, the comments from ECB Chair Lagarde will be closely watched as she is due to deliver opening remarks at the conference to mark the 30th anniversary of the Bank of Slovenia on Wednesday. In terms of economic data, the German ZEW survey is due for release on Tuesday and the region’s industrial production numbers are due Friday.

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