Today’s macro highlights:
Growing consensus at the Bank of England fails to lift Pound
There were two key data releases yesterday, both relating to the UK economy and despite the underlying tone, neither was able to lend any meaningful support to Sterling. The appearance by four MPC members in front of politicians did bring something new to the table with Gertjan Vlieghe suggesting we could see up to two rate hikes a year in the near term. This is more aggressive than the mantra of around one hike per year through to 2021, but any upside for the Pound was short lived as the message from other attendees was far more measured. We also saw government borrowing figures jump from last month’s surplus but still came in below forecasts. On the face of it this should be positive for Sterling, but it seems that uncertainty continues to prevail as to whether the UK economy can bounce back from its slow start to the year.
If it’s been a quiet start to the week in terms of economic data, the tempo is set to change today with a busy calendar on both sides of the Atlantic. Eurozone PMI readings are scheduled for publication at 9am BST, with the Germany-specific data preceding this by 30 minutes. Expectations are for little change from last month’s figures, but any notable shortfalls would reopen that debate as to whether the ECB can continue to talk around how quickly the economy is slowing - and in turn whether it can afford to conclude the bond buying scheme. A miss in these figures could be the catalyst for another leg lower on the Euro.
UK inflation readings are expected at 9.30am BST and the question is whether this will offer any fresh clues over monetary policy at the Bank of England. Rising oil prices are going to be lifting the number and although the reported real wage growth does give the bank a little more room for manoeuvre - consumers should be able to afford higher mortgage repayments - the bigger question is whether pay packets can continue to increase. We’re really looking for a ‘Goldilocks’ figure here - too low and the risk is that economic growth has been stubbed out, whilst too high will raise fears that consumers might not be able to stomach a rate hike.
The afternoon session will see a flurry of readings out of the US and again there are no surprises expected here, but the big event to watch will be the release of the latest FOMC meeting minutes at 7pm BST. Although the detail will be scrutinised, the key point to watch will be how the committee voted. Expectations are that all eight members will have elected for no change and this may reinforce the idea that we’ll still see three rate hikes before the year is out. However any shift away from this unanimous view could sow seeds of doubt, with the risk being weighted on the downside for the dollar if we see any dovish bias appearing.
Cable managed to hold above the 1.34 level through yesterday’s session but still appears vulnerable on the downside. We do however have two key releases today that could drive sentiment here. A hawkish tone from the Federal Reserve or a notable miss either way for the UK inflation print would open the way for the pair to test fresh lows for the year.
The pair is holding just above weekly lows. The trend is very much downward but we could be getting to a position where good news for the US is fully priced in, so even a vague positive for the Eurozone could provide meaningful support, potentially with a return to the 1.20’s seen mid-month.
The pair is trading stubbornly sideways and today’s battle is likely to be between those Eurozone PMI readings and the UK inflation print. This pair could still go either way - a break below the May lows of 1.13 or above the April highs of 1.16 are entirely feasible.