Understanding inflation globally
Daily Currency Update
The Bank of England made a significant move by raising interest rates by 50 points, resulting in a rate of 5.0%. Surprisingly, this decision was contrary to the expectations of UK analysts, who had predicted a minor increase of 25 points. However, money markets had already incorporated a possibility of such a raise. The BoE justified its decision by maintaining a bias towards tightening and highlighting the potential need for further measures if sustained inflationary pressures emerge. Governor Bailey acknowledged the economy's better-than-expected performance but emphasized the persistently high inflation demands attention.The May inflation report delivered yet another surprise in both the headline and the core indices, with the latter rising to yet another three-decade high. Core inflation rose from 6.8% to 7.1% and the headline inflation came in flat but at an elevated level of 8.7%.
According to market analysts, there is a 75% likelihood of another 50-point rate increase by the Bank on August 3rd, with the final rate estimated to be slightly above 6%.
Key Movers
Global economic sentiment took a turn for the worse. The PMIs of business activity, perhaps the timeliest indicator of economic activity, surprised to the downside, particularly in the Eurozone, reviving recession fears. The USD generally benefits from uncertainty and flight from risk, and last week was no exception. The dollar outperformed every major currency.Two events should focus the market’s attention. The ECB’s Sintra conference of central bankers will feature speeches from President Lagarde and Fed Chair Powell, which will be closely scrutinized for clues about future policy moves.
The ECB is now between a rock and a hard place, facing stagflation. In spite of the economic slowdown, the core inflation number for June out this Friday is expected to rebound and remain well above 5%. We expect the ECB to make good on its promise and prioritise the inflation fight. However, further gains in the euro may have to wait for a clear sign that the Eurozone economy is on a growth path.
Expected Ranges
- GBP/USD: 1.2710 - 1.2820 ▲
- GBP/EUR: 1.1625 - 1.1680 ▲
- EUR/USD: 1.0901 - 1.0950 ▲