As I mentioned last week, we were expecting a 25 bps hike from the BoE, however after another high inflation reading, the Central Bank had to make a more aggressive move on Thursday and decided to go with a 50 bps hike- stating that things are worse than they anticipated and that inflation is still stubbornly high. Although many of you have probably already read up on the implications- I think it is important to look at what could happen here. Of course, the main issue is mortgages in the UK, there are many mortgage holders due to renew over the next 12-24 months who would feel the sting of higher rates-in reality this is probably enough to bring down inflation, but this could also take a while depending on when people have to renew. Next, even though inflation stayed higher, petrol and diesel have both dropped in price in the UK, energy prices are lower and food costs are due to come down- so we know inflation driven by these factors will also come down. Lastly, the labor market in the UK alongside wages is also slowing, however, the BoE can’t afford to risk the timing of this, so, either way, we will see inflation come down, but the BoE wants to speed up the process. With the next BoE meeting not due until August, we will be able to see how data releases play out through July before trying to assess what the BoE will do in August- although it seems 6% (Another 100bps of hikes) is priced in for now.
With this being the last week of the month I am not expecting things to be too eventful, we have ECB’s President Lagarde speaking on Monday evening which could potentially shed some light on the ECB’s next move, with the Eurozone now technically being in a recession, it will be interesting to see how Hawkish the ECB will now be- President Lagarde is also speaking on Tuesday morning so any potential good soundbites could be taken from either of these speeches.
The next key speech will be from Fed Chair Powell on Wednesday, again, there is no real agenda but we will be waiting to hear any forward guidance- the Fed have paused their rate hikes for now but it seems Powell is using his speeches to reiterate that he will continue hiking later this year- we also have another Powell speech the next morning.
The main data release will be GDP numbers for the UK on Friday, with a forecast of 0.2%, anything above 0 will be seen as very positive, and will continue to be evidence that the BoE can continue hiking interest rates- any lower reading will almost definitely weaken the Pound. Later on Friday we have Eurozone inflation data, which, surprisingly is expected slightly higher at 5.5%, which would give the ECB enough of a case to continue hiking interest rates in their next meetings.Lastly we have U.S PCE price index data which effectively measures the prices paid by the consumer for domestic purchases of goods and services, and tgis data is expected to stay the same at 4.7%- any change would affect the Dollar.