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  • richard evans

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

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