EURUSD rallied into fresh 18-week highs on Wednesday as market sentiment tilts firmly into the risk-on side ahead of the European Central Bank’s latest rate call later on Thursday. Broad market risk appetite remains pinned into the ceiling as markets fully price in a rate cut from the Federal Reserve on September 18. ECB and … Read more
Eurozone business activity expanded at its quickest rate in a year in May as growth in the bloc’s dominant services industry outpaced contraction in manufacturing, according to a private survey, which also showed price pressures easing.HCOB’s composite Purchasing Managers’ Index (PMI) for the currency union, compiled by S&P Global and seen as a good gauge … Read more
The euro is experiencing a third successive decline against the pound sterling, with the EURGBP pair rising sharply at 0.8531, notching a 0.26% gain. Eurozone inflation data, both headline and core HICP, exceeded forecasts, potentially impacting the timing of the ECB’s easing cycle. Spain’s HICP data came in higher than expected at 3.8% YoY, while Germany’s HICP harmonised inflation rate increased to 2.8% YoY. The EU’s block figures also rose, indicating unexpected inflation pressures that may lead the ECB to reconsider its dovish stance.
The Bank of England’s Monetary Policy Committee voted 7-2 to keep interest rates at 5.25 per cent, with Deputy Governor Dave Ramsden and Swati Dhingra voting for a cut to 5 per cent. The BoE hinted at a potential rate cut in June and emphasized the importance of upcoming economic data releases. Governor Andrew Bailey expressed optimism about the direction of inflation.
An early Easter boosted food spending in Britain last month, lifting retail sales by the most since August.
British businesses are reducing their plans for staffing and wage increases due to the impending minimum wage rise in April. The Lloyds Bank Business Barometer showed a decrease in the measure of staffing plans and the share of firms expecting to increase wages by 3% or more. The minimum wage in Britain will rise by nearly 10% next month, impacting businesses, especially smaller firms. The Resolution Foundation think tank highlighted the success of Britain’s introduction of the minimum wage 25 years ago in increasing the pay of low earners.
The Federal Reserve reported a record loss of 4.3 billion in 2023, mainly due to expenses related to managing the US central bank’s short-term interest rate target.
British inflation slowed in February, with consumer prices rising by 3.4% in annual terms after a 4.0% increase in January. This was the weakest rate of inflation since September 2021. Core inflation, which excludes energy, food, and tobacco prices, also slowed to 4.5% from 5.1% in January. Despite the moderation, Britain still has the highest rate of headline inflation among the Group of Seven advanced economies, with consumer prices having increased by more than 21% since the end of 2020. The Bank of England (BoE) has indicated that underlying inflation pressures remain too persistent for it to cut interest rates now, although it has signaled that lower borrowing costs are likely later this year. Finance Minister Jeremy Hunt mentioned that the fall in inflation could help the government with its goal of abolishing social security taxes, provided it does not lead to increased borrowing or cuts in funding for public services.
The Bank of England is expected to maintain uncertainty about when it will start reducing interest rates, awaiting clearer evidence that inflation pressures are diminishing. Despite other central banks moving towards cutting borrowing costs post-COVID pandemic and inflation projected to decrease to the 2% target soon, the BoE has labeled its high rates as “under review.” Governor Andrew Bailey expressed a cautiously optimistic outlook, noting inflation expectations appear controlled and concerns over a price-wage spiral are lessening. However, Bailey indicated no rush to lower the Bank Rate from its 16-year peak of 5.25%, citing labor market data uncertainties and geopolitical risks. In February, the decision to keep the Bank Rate steady was supported by six rate-setters, with two advocating for an increase and one for a reduction. Analysts anticipate a similar 6-2-1 vote split in the next decision, potentially influenced by upcoming inflation data. The BoE forecasts inflation to slow to 2% in the second quarter following a decrease in regulated energy costs but expects a rise to almost 3% later in 2024. Inflation reached a high of 11.1% in October 2022. The central bank remains concerned about the risk posed by fast-growing wages, with Britain’s minimum wage set to increase by nearly 10% and employers offering pay settlements of about 5% since the start of 2024. Former BoE deputy governor Charlie Bean highlighted that Britain’s pay growth is roughly double the level consistent with 2% inflation. The BoE is seen as moving more slowly towards rate cuts compared to other central banks, with the British economy showing signs of recovery from a short recession. Finance minister Jeremy Hunt announced tax cuts to moderately boost consumers. The European Central Bank and the US Federal Reserve are contemplating rate cuts, potentially placing the BoE behind. Economists at HSBC predict inflation could drop to as low as 1.2% in May and June before rising later in the year, challenging the BoE’s communication on maintaining its current stance. A Reuters poll shows economists mostly expect rate cuts to begin in the third quarter, with 40% anticipating a move in the second quarter. Investors do not fully expect a quarter-point cut until August. The BoE’s March monetary policy decision will be announced without a press conference, as no new economic forecasts are due to be published.