Pound could get a boost if BoE considers a rate hike
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Will the lighter calendar offer relief for the pound?
The GBP/EUR cross continued to rise for the third consecutive session, during the European session on Thursday. The pound (GBP) found support as the markets anticipate that the Bank of England (BoE) will possibly delay rate cuts until the next quarter, according to median forecasts in a Reuters poll. On Tuesday, Bank of England Chief Economist Huw Pill said that interest rate cuts remain some way off, despite negative news on inflation. The hawkish expectations for the BoE have increased after a fresh increase in bond supply by the UK government. Due to stubborn inflation and a strong domestic Purchasing Managers Index (PMI), expectations of the first BoE rate cut have been pushed back.
In Europe, European Central Bank (ECB) policymakers are planning to lower interest rates this year. ECB President Christine Lagarde said last Monday that the central bank might reduce its deposit rate from a record-high of 4% in June with further measures open to consideration. The dovish stance of the ECB weighed on the euro and offered support to the GBP/EUR cross.
ECB board member Isabel Schnabel said at a conference on Thursday that there may be obstacles achieving 2% Eurozone inflation, highlighting that services inflation remains a concern. The German GfK Consumer Confidence Survey for May came in better-than-expected at -24.2, compared to the -25.9 forecast and the prior figure of -27.3. German consumer sentiment is expected to improve in the coming months due to higher income expectations. UK Consumer Confidence data on Friday (26/04) are expected to slightly improve in April.
In terms of economic data, we note the following: the Eurozone’s business climate for April and Germany’s preliminary HICP rate for April, both due out on Monday. On Tuesday, we get France’s preliminary Q1 GDP and HICP rates for April, Germany and the Eurozone’s preliminary GDP Rate for Q1 and the Eurozone’s preliminary HICP rate for April. On Thursday we draw attention to the UK’s Nationwide House Prices for April.
Expected Volatility – Medium
If the preliminary HICP rates for April slow down further and come in nearer to the ECB’s 2% target, then the euro could weaken. The preliminary GDP rates for Q1 will also be influential and if they also slow down, the euro could weaken as recession fears may trigger investor concerns.
Fed interest decision and employment data in the spotlight
The pound remained strong against the US dollar (USD) in Friday’s London session. The GBP/USD was supported after recent data has shown an improved economic outlook for the United Kingdom despite higher interest rates.
The preliminary PMI report from S&P Global/CIPS for April released on Tuesday showed that activity in the services sector was strong, despite a slower Manufacturing PMI. The data also confirmed that the services sector remained robust due to new business inflows.
While increased demand for services boosts employment and wages in the sector, it also adds to inflationary pressures, which means progress in bringing inflation down to the 2% target could stall. BoE policymakers have also expressed worries about high service inflation. UK annual service inflation is currently at 6%, which is higher than what is required to bring down inflation to the 2% target.
Some BoE policymakers expect inflation to fall in the upcoming months but have not yet provided a timeframe for interest rate cuts. BoE Governor Andrew Bailey has said that market expectations for two or three rate cuts was not “unreasonable”.
The US dollar came under pressure on Thursday after the preliminary United States Gross Domestic Product (GDP) growth in the first quarter came in weaker than expected. The economy expanded at a slower pace of 1.6% in Q1, below forecasts of 2.5% and the priorreading of 3.4%. Despite the disappointing data, markets expect the Federal Reserve to start reducing interest rates from September or in the fourth quarter as the GDP Price Index was significantly higher. The inflation rate increased to 3.1% from the previous reading of 1.7%.
For the coming week, we highlight the Fed’s monetary policy decision, which will be announced on Wednesday. The Fed is widely expected to keep interest rates unchanged in the range of 5.25%-5.50%. Analysts and traders will scrutinise the Fed’s guidance for interest rates.
In terms of US economic data, we note the following: On Wednesday we get the release of the ISM manufacturing PMI figure for April. On Thursday, the weekly initial jobless claims figure and March’s factory orders. On Friday, ISM non-manufacturing PMI figure for April and US employment report for April will draw attention.
Expected Volatility – Medium
On Wednesday, if the Fed’s forward guidance signals a delay of rate cuts, then the USD will strengthen. The release of the US employment report for April will also have a big impact on the market. If it shows that the market remains strong, then the USD will strengthen. Additionally, Wednesday’s release of the ISM manufacturing and Friday’s release of the non-manufacturing PMI figures for April will also influence. If both releases demonstrate that economic activity in the sectors has expanded faster than expected, then the USD will gain support.
Will GDP and HICP rates move the euro?
The EUR/USD recovered due to the release of lower-than-expected US PMI data on Tuesday which weakened the dollar. The pair recovered from earlier losses after the release of preliminary Eurozone Purchasing Manager Index (PMI) data for April. The S&P Global Manufacturing PMI fell into contraction territory after a 49.9 reading which was below the 50 threshold which separate growth from contraction. The result was significantly lower than the 51.9 of March and the 52.0 forecast. The S&P Global Composite PMI came in at 50.9 from 52.1 prior.
On Wednesday, improved risk appetite supported the euro. On the monetary front, the ECB is expected to cut rates in June, while the Fed is still expected to reduce borrowing costs in September. On Thursday the EUR/USD fell sharply after the release of US Gross Domestic Product (GDP) data for the first quarter. On Friday, the pair recovered ahead of the key release of March, the core Personal Consumption Expenditures Price Index (PCE), which is also the Fed’s favourite indicator of inflation.
Expected Volatility – Medium
If the preliminary HICP rates for April slow down further and come in nearer to the ECB’s 2% target, then the euro could weaken. The preliminary GDP rates for Q1 will also be influential and if they also slow down, the euro could weaken as recession fears may trigger investor concerns.
Mexican Peso (MXN)
The Mexican peso traded lower in most pairs on Friday as stubborn inflation in most developed economies has pushed back expectations for interest rate cuts helping to support their currencies. USD/MXN, EUR/MXN and GBP/MXN were all trading up during the European session on Friday.
On Thursday, the US first quarter GDP data showed an unexpected rise in inflation which weakened the peso against the US dollar. While the US GDP annualised slowed to 1.6% missing estimates, the US dollar gained after the Personal Consumption Expenditures Prices component, which measures the change in prices of goods, came in higher compared to the previous quarter. This has led markets to push back their expectations of when the Fed will
start cutting interest rates.
The Banxico, the central bank of Mexico, has stressed its data-dependent approach in its outlook for interest rates, and despite cutting rates by 0.25% in March, a further cut in May is unlikely. March’s Mexican inflation data which was out earlier this week came in mixed with a rise in headline inflation and a drop in core inflation. Most analysts expect Banxico to hold rates unchanged at the May meeting but expect a rate cut in June. They anticipate the main reference rate to end at 10.00%, up from 9.63% previously.
In terms of data, we note on Tuesday the release of Fiscal Balance. On the 1st of May the market will be closed for Labour day.
Australian Dollar (AUD)
Recent macroeconomic indicators suggest an improvement in Australia’s economic activity, with preliminary PMI figures for April showing positive signs. The easing of inflationary pressures in the first quarter of the year has allowed the Reserve Bank of Australia (RBA) to adopt a less hawkish stance. Despite this, market participants don’t anticipate any rate cuts from the RBA until the end of the year.
If the market outlook remains positive, the Aussie will find support, while a risk-off sentiment will weigh on the AUD.
Due to the close economic ties between Australia and China, we would like to note the release of China’s National Bureau of Statistics (NBS) and Caixin manufacturing Purchasing Managers’ Index (PMI) figures for April. If both indicators show an expansion of economic activity in China’s manufacturing sector, the CAD will find support. On Tuesday, we note Australia’s retail sales for March, while on Thursday, we get building approvals for March.
Canadian Dollar (CAD)
The Canadian dollar found support from improved market sentiment and stabilising oil prices. Despite a slight improvement in February’s retail sales growth rate, which remained negative, disappointing macroeconomic indicators persist. On the inflation front, prices increased faster than expected for producers in March on a month-on-month basis. Looking ahead, the release of Canada’s GDP rate for February on Tuesday could potentially brighten the economic outlook and provide further support for the CAD. Additionally, attention will be on the manufacturing Purchasing Managers’ Index (PMI) figure for April and Canada’s trade data for March due out on Thursday.