GBP | BoE to hold again

The Bank of England provides a policy update and is still suggesting that UK interest rates will eventually rise. However, given the Brexit uncertainty, the Committee is likely to say that they should hold fire for now. Thursday’s policy update is likely to be another unanimous vote for no change in rates. It will be interesting to see the reaction to recent data with growth slowing, but wage growth being driven higher. Governor Carney will also speak in the evening at Mansion House.

This week’s data is not expected to put any pressure on the MPC. Inflation moved above the 2% target to 2.1% in April, due to the timing of Easter. We are likely to be back to 2% in May. Retail sales have been positive so far this year and real wages gains and employment provide support. However, recent surveys point to a sharp decline in May with many expecting a modest fall. Last week saw GDP fall by 0.4% in April and manufacturing output by 3.9% as car producers brought forward summer shutdowns.

On Thursday the first three candidates were knocked out of the Tory leadership contest. Matt Hancock has since pulled out and others may follow. Boris Johnson had the most support from Tory MPs and will almost certainly be one of the two candidates to go forward to the postal vote. If tomorrow’s poll doesn’t take us down to two candidates, there will be further votes on Wednesday and Thursday.

 

 

EUR | EU leaders summit

There is an EU leaders summit this Thursday and Friday. One of the key things to be discussed is who will become the next European Commission President. The leaders should agree on a nominee to be confirmed by the European Parliament in July. However, reports suggest that they are still some way from a consensus. Their decision will also have affect who will be appointed to other key European leadership positions. Key amongst this is European Central Bank President Draghi’s successor, which needs to be decided by the autumn.

On the data side, the June German ZEW survey and the Eurozone PMIs are released. These will provide some indication of whether economic growth is picking up towards the end of the second quarter. Analysts expect a small rise in both the services and manufacturing PMIs which will still only point to relatively sluggish growth. Last week, we saw Eurozone April industrial production fall by 0.5%.

 

 

USD | Dovish Fed policy update expected

The June Fed policy update is likely to be a key event for markets. An immediate US interest rate cut is unlikely, though markets expect a signal that rates will be cut in coming months. The sharp falls in equity prices and rally in government bonds reflect concerns about economic growth. At least one cut to rates is expected by markets before the end of the year with late July a possibility. The chances of three or more cuts by June 2020 is now around 80%.

Until recently Fed comments suggested the economy was robust enough to justify a ‘patient’ approach. However, recent comments from Fed Chair Powell seem to acknowledge that action may need to be taken. A more dovish policy update is therefore expected that will leave the door open to a rate reduction possibly as early as July. The interest rate projections are also expected to show a move from rate hikes towards cuts.

Last week saw May CPI inflation rise 1.8%, though this was lower than the 2.0% reading in April. US retail sales also showed positive momentum with an increase of 0.5% in May. Beyond the Fed meeting, there is only housing starts data this week.

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