April 17, 2024

“British wage growth and inflation remain strong, and this has given the damaged pound something of a boost this week. The tide continues to turn towards later cuts for the Federal Reserve, meanwhile, with Chair Powell coming to the conclusion that inflation may not evolve as he had expected – we’ll look to see what his colleagues think later today.”

Tim Hallinan – Trading Director

Main Headlines

Interest in the upcoming European Parliament election has surged among Europeans compared to the previous vote five years ago, with a Eurobarometer survey indicating that 60% of respondents are very or somewhat interested in the June 6-9 election, compared to 49% before the 2019 election. Top campaign issues include poverty, health, jobs, and defence.

The UK labour inactivity rate – those without a job who are not looking for one – has hit an 8-year high of 22.2%, according to data released by the ONS. This leaves the UK as the only G7 country to have not brought the rate down to pre-pandemic levels, posing a challenge economic growth and public finances.

GBP

Sticky British inflation has handed the pound a modest boost this morning, although it remains within 0.4% of the five-month low clocked yesterday. Headline CPI inflation fell a touch less than expected from 3.4% to 3.2% in March and, while the direction of travel still safely points to cuts later this year, there will be plenty to be alarmed about for policymakers. Core inflation – which excludes volatile food and energy components – fell to 4.2% and is coming down at a healthy pace, but remains over double the 2% target. And services inflation fell only marginally to 6.0%, beating the Bank of England’s 5.8% forecast, which should rattle those on the MPC worried about inflationary persistence. The market is still looking for an August rate cut, but next month’s CPI is likely to be consequential for the rest of the year, with a lower energy price cap and a higher National Living Wage set to begin to filter through. Today, Governor Bailey will speak later in the afternoon in Washington, after ratifying the view yesterday that the inflationary dynamics in the US and UK are too dissimilar to be directly compared.

EUR

The euro is relatively defenceless this week, without any headline pieces of data to make a bounce back from its lowest levels since November. Climbing German investor optimism gave it a modest boost yesterday as the ZEW score for the eurozone jumped more than expected to the highest level in over two years, driven by hopes for a recovering global economy. ECB President Lagarde speaks later today, although she is likely to retain the dovish stance offered last week when she outlined the low bar for a first rate cut in June.

USD

The dollar steadied yesterday, having climbed over 2% in the past week as sticky inflation and gaping rate differentials draw inflows into the US. The 2-year Treasury yield tested 5.00% for the second time yesterday evening, as Fed Chair Powell adjusted his communication to wind back his confidence somewhat after last week’s data, admitting that it is likely to be a longer wait than he previously expected before he’ll be able to deliver a rate cut. Jefferson mirrored his comments, saying that the Fed is prepared to keep policy tighter for longer if inflation does not begin to turn the corner. The dollar struggled to draw much strength, however, with markets presumably foreseeing this likely change in tone now that disinflation has hit a wall in Q1. There are no big data releases today, diverting the attention again to the central bank speakers, which include Mester and Bowman later tonight.

Markets

Equities have generally steadied following the rates-induced selloff triggered by high US inflation and trimmed cut bets. The FTSE 100 was an outlying underperformer yesterday, slipping over 1% as UK wage growth printed higher than expected.

Main Economic Events (All Times CET)

7:00am: UK CPI
2:05pm: BoE’s Greene speaks
6:00pm: BoE Governor Bailey speaks
8:00pm: ECB President Lagarde speaks
11:30pm: Fed’s Mester speaks

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