May 09, 2024

“Sterling is under the spotlight today, with the Bank of England set to update both its guidance and its forecasts for interest rates later on. Some Q1 GDP numbers follow first thing tomorrow morning for the UK, while those in the US and eurozone are firmly focused on the US CPI data next week.”

Sam Cornford – Head of Trading

Main Headlines

During his visit to Serbia on Wednesday, Chinese President Xi Jinping emphasised a commitment to a ‘shared future’ between China and Serbia, underscoring his efforts to bolster alliances with nations on the outskirts of the European Union. This visit marks Xi’s first European tour in five years, strategically aiming to reinforce connections with Eastern European countries known for their pro-Russia stance and significant reliance on Chinese investment.

In another blow to Prime Minister Rishi Sunak’s Conservative Party, a second lawmaker Natalie Elphicke defected to the opposition Labour Party on Wednesday, citing broken promises and labelling the government as ‘tired and chaotic.’ With the Conservatives trailing Labour by approximately 20 points in opinion polls ahead of the anticipated national election this year, and following significant losses in local elections last week, the defection underscores challenges facing Sunak’s party.

GBP

All eyes are on the Bank of England decision today, where policymakers should take a step forward to soften their communication and lay the foundations for a rate cut this summer. Sterling has spent the past week ticking lower, as talk builds about a dovish turn that could align the BoE more with the ECB than the Fed. A June cut is priced at 50/50 but the bank is likely to stop short of following the ECB’s lead in pre-announcing a move for next month, although some indication that they are nearing an appropriate time to ease policy is a strong possibility. Beyond the policy statement, a downward revision to the inflation forecasts was hinted at by Ramsden last month. In a worst-case scenario for sterling, the projections could signal a sustained return to the 2% target this quarter, or even an undershoot, which would suggest a much greater volume of cuts than the two currently priced in this year. While there is a non-negligible chance that Ramsden joins Dhingra by adding a second cut vote into the mix, it is quite rare for an internal member of the MPC to defect from the consensus. If today’s rate decision wasn’t enough, we’ve also got a Q1 GDP print tomorrow morning that is expected to post a healthier 0.4% growth and give an early exit to the technical recession.

EUR

The incoming data impulses from the UK and the US will guide the euro over the next week, with the common currency trading steadily amid holidays across Europe. On the domestic side, markets continue to ask questions about the post-June rate trajectory. ECB officials had a couple of things to say yesterday – Austria’s Holzmann referred to the Fed as the ‘gorilla in the room’ that could largely restrict the pace of rate cuts if it diverges too far and weakens the euro significantly, while Wunsch stressed inflationary risks but saw a path for 50bps in cuts this year. The BoE could drag the euro in the direction of sterling against the dollar this afternoon, but the biggest moves are likely to come from the US inflation prints next week.

USD

The dollar is holding firm through a quiet week, particularly against the yen, as traders gear up for potential fireworks from next week’s inflation data. A post-intervention recovery in USD/JPY has been a tailwind for the greenback this week, climbing more than 2% from the trough that Tokyo sent it hurtling towards last Friday. The intervention has not had the impact that the MoF intended, and traders are looking through the risk and buying the dips in the expectation that momentum towards 160 will stay resilient, despite indications this morning that BoJ policymakers are eyeing a series of rate hikes this year. CPI next week is still the focus for the dollar, but a speech from Daly and the weekly jobless claims prints will be the events to watch today.

Markets

US stocks stalled with thanks to a drag from poor Uber forecasts yesterday, while European bourses soared to record highs, boosted by bumper earnings that sent the FTSE 100 and the Stoxx 600 to record highs.

Main Economic Events (All Times CET)

1:00pm: BoE Rate Decision
1:30pm: BoE Press Conference
2:30pm: US Jobless Claims
5:00pm: BoC Governor Macklem speaks
6:15pm: BoE Chief Economist Pill speaks
8:00pm: Fed’s Daly speaks

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