- BoE should remain on hold despite inflation rising well beyond target;
- Fed signals another hike this year but markets aren’t buying it;
- Strong Australian jobs report aids further gains in AUDUSD.
The UK will be back in focus again on Thursday as the Bank of England announces its latest monetary policy decision, amid all the political chaos following last week’s snap election result, and we’ll also get retail sales numbers for May.
The timing of the latest monetary policy decision from the BoE couldn’t be much worse, as the country prepares to start Brexit negotiations without a stable government following the surprising snap election result. To make matters worse for policy makers, this comes as inflation has hit 2.9%, higher than what it anticipated would be the peak only a month ago.
While policy makers claimed after the last meeting that they would only need little upside news on growth or inflation to consider voting for tighter policy, I would be extremely surprised to see them act at this moment in time. The huge amount of economic uncertainty paired with the temporary drivers of inflation and lower growth prospects is surely a good enough reason to look through the current spike in prices. Should they not look beyond this and even signal a possible hike in the near-term, it would catch markets completely off guard which could provide a significant boost to sterling.
The Federal Reserve finds itself in a far more privileged position, albeit still not an ideal one, with growth prospects much better, the economy in better shape and inflation at a level that allows for tighter policy without necessitating the need for it. The FOMC raised interest rates for a second time this year on Wednesday – as was fully expected and priced in – and signalled an intention to do so again this year while laying out plans to begin reducing the size of its balance sheet.
Traders appear unconvinced by the possibility of another rate hike this year, despite what the Fed indicated, with the implied probability of one by December standing at below 50%. Investors appear concerned about the slowing pace of inflation but this doesn’t seem to bother policy makers, who revised down their projection for this year to 1.6%, from 1.9% previously, while maintaining their forecasts of 2% for 2018 and 2019.
A strong jobs report boosted the Australian dollar overnight, as stronger gains in employment – boosted entirely by full time roles – brought the unemployment rate back to a four year low, while participation rose to its highest in almost a year.
Still to come today there’s plenty of economic data being released, including retail sales from the UK, which are expected to have softened again in May following the Easter holiday driven spike in April. We’ll also get plenty of numbers from the US this afternoon including jobless claims, Philly Fed manufacturing index and industrial production.
