June 20, 2024

“With no less than three central bank decisions today, European FX is in for a big day. The Bank of England is expected to hold steady after some strong services inflation figures, but traders are looking for any changes to the vote split or the policy statement.”

Tim Hallinan – Trading Director

Main Headlines

Central bank rate decisions arrive in the UK, Norway, Switzerland, China, and Indonesia today. Sticky inflation should put the focus on forward guidance in the UK and Norway, a stronger franc and on-target inflation mean that a majority are looking for a second cut in Switzerland, and central bankers in Asia have already held rates steady.

The UK Labour Party’s poll lead continues to hold as the election vote draws nearer. A YouGov poll with a 40,000 sample was carried out June 11-18 and suggests that Labour would win 425 seats versus the Conservatives’ 108 – the biggest Labour majority ever. Polling company Savanta estimated 516 seats, while the figure from More in Common was 406.

GBP

A 2% inflation print is very unlikely to be enough to trigger a Bank of England rate cut today, leaving sterling in the hands of any edits to the policy statement and the vote split. If we rewind back to the May meeting, a June cut appeared the obvious call: Deputy Governor became the second MPC member to call for a cut, the official forecasts suggested that there were more cuts coming than the market was expecting, and Bailey himself seemed remarkably open to a near-term move. However, services inflation – the BoE’s more closely watched measure for an underlying trend right now – has since surprised sharply to the upside and sits at 5.7%. That’s hard to square with a sustainable 2% rate of inflation, which for now is being achieved by the transitory effects of a normalisation in food and energy prices. An August cut could remain on the table, but there is likely to be a touch of caution. The consensus is for another 7-2 vote, although a pre-election blackout leaves some scope for a surprise.

EUR

Although still far below levels before Macron called a snap election that ignited debt crisis fears, the euro has drifted around 0.6% higher from its trough on Friday. Yesterday’s biggest news was the return of the EU’s fiscal spending rules after a four-year Covid-related hiatus, with seven countries placed under the Excessive Deficit Procedure, including France and Italy. It amounts to Brussels urging high-spending governments to rein in their budget deficits back to 3% of GDP, with an underlying threat of fines if they do not comply. There is little hope that this will sway Macron’s rivals in France into curtailing their fiscal plans, however. Developments abroad are set to guide the euro today, with the SNB so far giving it a boost by cutting rates this morning, accompanied by a particularly dovish set of forecasts that still put inflation on a downward trend from the current 1.4%, suggesting that further cuts are coming this year.

USD

The dollar has lacked direction over the past few days but has plenty of cues for movement towards the end of this week. While a US bank holiday emptied the diary yesterday, a string of central bank decisions this morning and an unemployment claims print this afternoon should ramp up intraday volatility against its major peers. After a long period of stability, we have had some higher jobless numbers recently amid a general softening in the labour market that has boosted hopes for rate cuts this year. Today’s figure is expected to ease slightly from 242K to 235K. Tomorrow afternoon’s PMI data will be closely watched, too, given the resurgence in US economic activity last month.

Markets

With the US markets closed yesterday, most of the activity was in Asia. The Nvidia-AI tech boom continued to spill over into Asian equities, which hit a two-year high that was enough to drag the MSCI world index to a record peak. The UK’s FTSE 100 crept higher despite an initial knock from sticky services inflation, while stocks on the continent stayed relatively flat.

Main Economic Events (All Times CET)

9:30am: Swiss National Bank Rate Decision
10:00am: Norges Bank Rate Decision
1:00pm: Bank of England Rate Decision

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