USD up on higher US inflation expectations

Good morning

The US dollar has had a bit of a push higher, with GBPUSD dropping to 1.2445 overnight (now 1.2475) and EURUSD hitting a low of 1.0845 (now 1.0870). USDJPY meanwhile pushed up to 136.20 early this morning, now sits 135.95. A higher reading from the Michigan inflation expectation Friday seemed to be the catalyst for the move, perhaps casting some doubt as to whether the time is right for the Fed to pause its rate rise cycle. We hear from a few Fed officials today, will be interesting to see what their feelings are on the matter. Recent comments have been reasonably hawkish.

The GBP decline came after last weeks BoE rate rise. Both USD and EUR had lost ground after their central banks tightened, now it se4ems to be GBP’s turn. GBPEUR had been up at 1.1545 last week, traded as lost as 1.1450 after the BoE rate rise, now sits 1.1480. Remember this 1.1460/70 area had capped the upside for some time, it looks like it could be turning into quite a pivotal level. We are holding above there for the time being.

USDTRY and EURTRY are up at 19.64 and 21.45 respectively as we await the final results of the Turkish elections. At the moment it looks as though Erdogan is ahead but with not quite enough of the vote to win outright, which would lead to a second election in two weeks time. He’d need 50% to win outright, BBC are reporting he currently has 49.49%. I’d be surprised if he doesn’t find the extra 0.51% but that’s just me being a bit sceptical about the democratic process there.

Ukraine’s Zelensky is in the UK to meet Sunak, his fourth stop on a brief topur of Europe having been in France, Germany and Italy already. His visit comes soon after UK announced it would be providing Ukraine with longer range missiles that will help Ukraine hit targets while staying far from Russian defences. Ongoing talks of more sanctions on Russia by the West although it is difficult to work out whether these have any lasting effect.

Arsenal seem to have blown their chances of a premier league title having lost to Brighton over the weekend although to be fair the damage had already been done after failing to beat Southampton and West Ham back in April, then drawing against Liverpool having been 2-0 up. Still, coming second to Man City isn’t anything to be ashamed of. Spurs on the other hand have plenty to be ashamed of. Going to be an interesting time for them, need to find a new manager who can rebuild the team and set them back onto winning ways for next season. Surprisingly I’ve not yet had the call…..

Good luck to anyone who has kids sitting GCSEs and A Levels which start this week. It’ll be a tough time for many. I have one who I’ll be having to stop from doing too much work and one who I’ll have to push to do any. No middle ground here. Anyway, best wishes to all, I hope it all goes smoothly and with the minimum of fuss and stress.

- 10.00 EU industrial production, growth forecasts

- 13.45 Feds Bostic speaks

- 14.15 Keds Kashkari speaks

- 17.30 Feds Barkin speaks

- 22.00 Feds Cook speaks

- 02.30 RBA minutes

- 03.00 China retail sales, industrial production

- 07.00 UK unemployment

GBP lower after BoE raises rates

Good morning

BoE did indeed raise rates 25bps to 4.5% yesterday, the twelfth consecutive raise. Two members did vote to keep rates unchanged. 2023 and 2024 GDP forecasts were revised higher, while BoE sees inflation possibly halving this year although would still be too high according to BoEs Bailey. So all pretty much as expected. So why did GBP weaken? Well Bailey did suggest April CPI could drop and that we could see a pause in rates if inflation does slow and a rate rise is June is highly data dependent.

GBPUSD dipped below 1.2500, now 1.2535, while GBPEUR fell back to 1.1450, now 1.1465, those small gains coming after the GDP announcement this morning. EURUSD holds around 1.0930. Ex-BoE official Saunders said there is a strong chance inflation will undershoot BoE forecasts in April and sees perhaps just one more rate rise although did add that rates may have peaked. Supermarkets have also said food prices are past the peak and that they should begin to fall although I’d happily bet we’re not getting anywhere near back to where they were a year or two ago.

US regional bank shares were hit again, the banking crisis clearly not going away. The US debt issues haven’t gone away either, still concerns mount over a possible US default.

NZD is weaker after a lower than expected inflation forecast overnight, GBPNZD trading up to 2.0050, some 250 points higher than yesterday. GBPAUD has been dragged higher, now just above 1.8700, but still well short of the early May highs around 1.9000.

South Africa got plenty of attention yesterday on reports they had given ammunition and weapons to Russia back in December. USDZAR jumped higher, currently trading 19.45 having started the week down at 18.27 or so. Similarly, GBPZAR leapt to 24.40 having been around 23.05 on Monday. If South Africa have sided with Russia it doesn’t bode well for them. An investigation is taking place.

In Turkey, a rival to Erdogan has withdrawn from the election which could see Kilicdaroglu, Erdogans main opponent, gain a larger share of the vote. Turkish equities rallied but TRY remains weak, USDTRY up at 19.57 and EURTRY 21.59. My money is still on Erdogan.

Kids have been packed off to school for the lat time, not including upcoming examinations. We appear to be having a fair number of them back to our house later in the day. Quite how many remains something of a mystery although I have a feeling my wife knows a little more than she is letting on. Lets hope the rain stays away and they can all stand outside.

Have a terrific weekend if we do not speak before

- 09.00 ECBs de Guindos speaks

- 12.15 BoEs Pill speaks

- 15.00 US Michigan sentiment survey

BoE set to raise rates 25bps to 4.5%, eyes on updated forecasts

Good morning

The initial reaction from yesterdays US inflation data was for US Dollar weakness as the headline YoY number was lower than expected at 4.9%, the first time it has been below 5% for two years. The thinking was of course that the Fed must surely be reaching a turning point with their rate rises, However that initial move didn’t last long, an hour or two later we back at pre-release levels and now the dollar is pushing higher still.

GBPUSD had been 1.2605 before the announcement, traded up to 1.2680, now all the way back to 1.2575. Similarly EURUSD went from 1.0945 to 1.1005, now 1.0925. GBPEUR spent much of the Asian session just below 1.1500 but is now back to 1.1510.

Of course the main focus today will be on BoE. A 25bps rise to 4.5% is pretty much completely priced in, although the vote is unlikely to be unanimous with perhaps two dissenters who would prefer to leave rates unchanged. As always, the press conference will be the key where we will be looking for clues as to the future path of rates. We’ll also have new economic forecasts from BoE which may suggest we are at less risk of slipping into recession.

Goldmans have been quite vocal about their idea that UK rates will need to hit 5% by August, they are not alone and with inflation staying firm despite lower energy prices it is not really a surprise. Wasn’t high inflation supposed to be transitory? If BoE were to say something like ‘a couple more rate rises to come’ then I’d expect GBP to push higher, but perhaps a signal from BoE that we are near a peak could see GBP sold off. However if the new forecasts are decent, GBP losses might be limited.

Meanwhile the US default concerns continue and while this is something that many feel is extremely unlikely, the cost of insuring against a US default have risen, Bloomberg report that it is more expensive to insure US treasuries against default than some emerging markets or even junk-rated nations. Sounds a bit far-fetched but I presume they have some data to back up those claims. Still, the mere fact we are taking about it is worrying enough.

This weekend we have the Turkish elections where Erdogan’s near twenty-year reign could come to an end as Kemal Kilicdaroglu, the opposition, is putting up a strong challenge. I may be completely wrong here, but with Erdogan controlling pretty much everything in Turkey, I’d have to question how accurate the results will be. My money is on Erdogan.

Other than BoE, we do have UK GDP out early tomorrow morning. Before then we hear from several central bank officials. We heard a little from ECB doves yesterday, Centeno and Villeroy both saying rates are very close to a peak, quite different to what we have heard from others. Overnight we’ll have data out of NZ, GBPNZD now down at 1.9850 but has actually traded below 1.9800, remember this was up at almost 2.0400 just a couple of weeks ago.

Quite a historic day for me today, as it is the last full day of school for my two youngest kids, both leave tomorrow to do GCSEs and A Levels, the younger won’t be staying on for A levels. As such, from Monday I’ll have no kids at school, apart from their attendance for exams! I remember many years ago when we marked the moment all our kids had started school, now they are all leaving. I feel even older than usual now!

- 12.00 BoE rate announcement

- 12.30 BoE press conference

- 13.00 ECBs Schnabel speaks

- 13.30 US initial jobless claims, PPI

- 15.15 Feds Waller speaks

- 18.30 ECBs de Guindos speaks

- 23.30 NZ business PMI

- 04.00 RBNZ inflation expectations

- 07.00 UK GDP, industrial production