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Dollar charge higher pauses; Bank of England Super Thursday in focus

Today’s macro highlights:

  • GBP - Quarterly Inflation Report
  • GBP - Monetary Policy Committee
  • USD - Consumer Price Index (April)

Dollar charge higher pauses; Bank of England Super Thursday in focus

The US dollar’s run higher paused for breath yesterday, with some softer than expected Producer Price Index data suggesting that inflationary pressures may already be easing. Tighter US monetary policy still seems inevitable, but news like this has the potential to take some of the pressure off the Federal Reserve for the remainder of the year. That said, this remains an isolated data point - job openings appear poised to drive wage inflation and we have CPI data out later today. This change in tempo could still prove to be very short lived.

It’s a busy day at the Bank of England, with the verdict of the latest MPC meeting (12pm BST), the quarterly inflation report (also 12pm BST) and a press conference from Mark Carney (12.30pm BST) combining to make for the so-called Super Thursday. The Bank has a tendency to coordinate changes in interest rates with the inflation report, hence the reason that just a few weeks ago, so many were confident that we’d be looking at a rate hike today. Consensus is - for now anyway - that a hike will now be seen in August, followed by a move up to 1% this time next year. Yes, the recent data has been soft, but this is expected to improve and assuming Mr Carney’s press conference confirms this theme - and there are no surprises in the MPC voting split - then the Pound has the potential to find more short-term support from these beaten down levels.

We also have a slew of output data for March from the UK at 9.30am BST. Whilst this will sit in the shadow of the Bank of England statements, the combination of Industrial Production, Manufacturing Production and Construction Output readings for March all coming at once could again provide meaningful direction for the Pound. The weaker currency should be bolstering the export market, but this also has the potential to fuel inflationary pressures. The construction reading is expected to flounder but assuming industrial and manufacturing production impress then again the Pound may have something worth cheering.

US Consumer Price Index inflation data for March will be published at 1.30pm BST and this will take on added significance in the wake of yesterday’s softer than expected PPI readings. The greenback has been finding support of late off the back of hawkish calls that we may see as many as four rate hikes in 2018. Anything that serves to reign in that expectation will have the potential to see US dollar gains trimmed further, at least in the near term.

Cable is still holding above 1.35, but the next move will be dictated by today’s inflation news from both sides of the Atlantic. For the pair to see some gains, we need news of a convergence in monetary policy so hawkish signals from the Bank of England could pave the way for a return to the upper 1.30’s.

The downtrend remains very much in evidence here with the pair having lost around five and a half cents over the last three weeks. Unless we see any shocks in today’s US data - and with nothing of note expected from the Eurozone - we have the potential to keep tracking on towards the mid-December lows.

The pair has now posted three days of successive gains and GBP/EUR is currently sitting around the resistance level we saw observed repeatedly in the second half of last year. Breaking above this level - supported by a hawkish outlook for monetary policy - could drive a return to levels not seen since last May.

Did you know - about the MPC…

The Bank of England’s monetary policy committee is made up of a panel of nine members, including the Bank’s governor as Chairman. They make decisions over interest rate policy with the primary aim of keeping inflation within a target range that is periodically set by the government. Although the panel used to make a statement monthly, the Bank of England Financial Services Act (2016) changed this schedule to just eight statements a year. Whilst today’s events may be loosely known as the MPC policy meeting, the panel typically meets formally three times in every statement cycle. The MPC also has the ability to adjust interest rates via emergency meetings should market conditions dictate.