23.05.23: UK Inflation Developments Crucial for Near-Term Sterling Moves against the Dollar and Euro
The latest PMI business confidence data releases on Tuesday will be important for global markets with data on the Euro-Zone, UK and US.
Market expectations are for the manufacturing sectors to remain in contraction in Europe with no growth in the US. Solid growth is expected in services across the board, but potentially at a slightly slower rate than in April.
The data will be important for the degree of confidence in the global economy. Firm data would provide relief while weaker data would trigger fresh reservations over the outlook.
The evidence on inflation and cost pressures will also be important. Stronger than expected pricing data would reinforce concerns that global central banks will have to be more aggressive in raising interest rates.
There will, however, be relief if the cost data suggests a further easing of pressures. In this context, evidence on services will be important.
The relative outlook for the European and US economies will also be a key element.
The dollar will tend to gain ground if the data suggest that the Euro-Zone is struggling while the US economy is out-performing.
Markets will also be monitoring the US debt ceiling developments closely during the day as the countdown to the June 1st deadline continues.
There were no significant UK developments on Monday with little net movement in the Pound.
The Pound to Dollar (GBP/USD) exchange rate again found support close to 1.2400, but failed to hold above 1.2450 and was held around 1.2425 on Tuesday.
The latest government borrowing requirement was again much higher than expected with debt interest payments at a record high, but energy support payments will now decline which will provide some relief.
There are important events over the next 24 hours with the PMI business confidence data on Tuesday followed by further testimony from Bank of England (BoE) officials.
BoE Governor Bailey and other Monetary Policy Committee members are due to testify to the Treasury Select Committee on the Monetary Policy Report.
The members will inevitably be grilled on inflation and interest rates. A strong commitment to beating inflation would reinforce expectations of further rate hikes.
The Pound will be vulnerable if the bank is more confident that inflation will decline sharply.
At Wednesday’s European open, the important UK inflation data will be released.
Consensus forecasts are for the headline rate to decline sharply to 8.2% from 10.1% with favourable base effects as last year’s jump in energy prices will come out of the calculation.
The core rate, however, is expected to remain at 6.2%.
The data will be very important for expectations surrounding BoE policy.
The overall evidence of inflation and monetary policy expectations will trigger a jump in Sterling volatility.
Overall, GBP/USD is likely to need higher than expected inflation data and hawkish BoE comments to make significant gains.
There were no significant Euro-Zone developments on Monday and tight ranges prevailed with the Euro overall unable to make headway.
The Euro to Dollar (EUR/USD) exchange rate stalled around 1.0830 and drifted lower to just below 1.0800 before settling close to this level.
According to Credit Agricole; “the focus will be on May PMIs and the German IFO on Wednesday as FX investors look for any evidence that the recent weakness of the manufacturing PMIs has spread to the services sector and thus added to the headwinds for the Euro-Zone economy.”
It adds; we continue to think that the EUR-USD rate spread has now peaked and could head lower in the near term, dragging EUR/USD down with it.”
There were no significant US developments on Monday.
The latest round of talks between President Biden and House speaker McCarthy were described as positive. There was a commitment to avoid a debt default, but no actual deal on raising the debt limit.
Treasury Secretary Yellen reiterated that there was a hard deadline on June 1st for avoiding a debt default.
The dollar overall was held in tight ranges with further support from hawkish Fed rhetoric.
Minneapolis Fed President Kashkari stated that it was a close call whether interest rates should be increased again at the June policy meeting. He added that there was no evidence that banking-sector stresses are doing the Fed’s job on inflation and it was possible that rates might need to increase to at least 6.0%.
St Louis head Bullard stated that the Fed will have to increase rates further, potentially by a further 50 basis points. He added that the previous projection of rates just above 5.00% was based on expectations of weaker growth and inflation improvements that have not been seen.
The dollar index held close to 8-week highs.
Overall, the dollar will maintain a firm underlying tone if Fed rhetoric remains hawkish and US negotiators edge towards a debt deal.
The yen has remained under pressure for much of the past 24 hours.
The Pound to Yen (GBP/JPY) exchange rate posted fresh 7-year highs just above 172.60 in Asia on Tuesday before a correction to 172.15.
Commodity currencies overall were held in tight ranges.
The Pound to Australian dollar (GBP/AUD) exchange rate settled around 1.8700.
The Pound to Canadian dollar (GBP/CAD) exchange rate drifted lower to trade around 1.6780.
The New Zealand dollar held firm ahead of the Reserve Bank of New Zealand policy decision.
The Pound to New Zealand dollar (GBP/NZD) exchange rate posted 6-week lows just below 1.9750 before a recovery to 1.9790.
As far as data releases are concerned, the PMI business confidence data will dominate during the day.
Developments in the US debt talks will be watched closely during the day.
Overnight, the Reserve Bank of New Zealand (RBNZ) will announce its latest policy decision.
Consensus forecasts are for the RBNZ are for a further increase of 25 basis points to 5.50%, but the shadow committee was divided with calls for no change in rates as well as increases of 25 and 50 basis points.
There will be very choppy trading after the decision and updated guidance for the bank.
Comments from Fed speakers will continue to be monitored closely during the day as speculation surrounding the June policy decision remains a significant element in currency markets.
09.00 – E19: “Flash” Manufacturing PMI (Consensus: 45.8)
09.00 – E19: “Flash” Services PMI (Consensus: 55.5)
09.00 – E19: “Flash” Composite PMI (Consensus: 53.5)
09.30 – UK: “Flash” Manufacturing PMI (Consensus: 48.0)
09.30 – UK: “Flash” Services PMI (Consensus: 55.5)
09.30 – UK: “Flash” Composite PMI (Consensus: 54.7)
13.00 – Hungary: Policy rate (Consensus: 13.00%)
Today – Nigeria: Central Bank interest rate (Consensus: 18.50%)
Wednesday – New Zealand: RBNZ official cash rate (Consensus: 5.50%)
Wednesday – UK: CPI YoY (Consensus: 8.1%)
Wednesday – UK: Core CPI YoY (Consensus: 6.0%)
Wednesday – UK: RPI (Consensus: 11.0%)
Thursday – Germany: Final GDP (Consensus: 0.0%)
Thursday – Indonesia: BI 7-day reverse repo rate (Consensus: 5.75%)
Thursday – Turkiye: One-week repo rate (Consensus: 8.50%)
Thursday – US: Real GDP (Consensus: 1.1%)
Thursday – Korea: BoK 7-day repo rate (Consensus: 3.50%)
Thursday – South Africa: Repo rate (Consensus: 8.25%)
Friday – Japan: Tokyo CPI YoY (Consensus: 3.4%)
Friday – Japan: Tokyo CPI ex-perishables YoY (Consensus: 3.4%)
Friday – Kazakhstan: Policy rate (Consensus: 16.75%)
Friday – UK: Retail sales YoY (Consensus: -2.8%)
Friday – US: Personal income MoM (Consensus: 0.4%)
Friday – US: Personal spending MoM (Consensus: 0.4%)
Friday – US: PCE price index MoM (Consensus: 0.3%)
Friday – US: Core PCE price index MoM (Consensus: 0.3%)
Friday – US: Advance trade balance for goods (Consensus: -$85.6bn)
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Tim Clayton
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