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Bank of England policymakers set to speak out

With the UK General Election in the rearview mirror, Bank of England (BoE) policymakers are free to return to the speaking circuit. The week’s highlight comes from BoE Chief economist Huw Pill, who, in my view, will be key in forming a majority for an August interest rate cut. Pill, along with Catherine Mann, are scheduled to speak on Wednesday and may answer some lingering questions. In June, we had an interest rate decision where, despite a hold of interest rates, the decision was described as “finely balanced”. We also had inflation data that showed services inflation easing but remaining above the BoE’s forecast. 

So I’m watching out for two things. First is the emphasis policymakers place on services inflation vs a more holistic view of the recent run-in wage, labour market and output data. Secondly, whether Pill agrees that the June rate decision was finely balanced. To my mind, a dovish inclination from Pill could be pivotal for an August rate cut.

Powell’s testimony and US inflation the focus for markets

Fed Chair Jerome Powell will deliver his semi-annual monetary policy testimony to congress this week. Powell will speak ahead of this week’s release of Consumer Price Index (CPI) data, and I expect him to sound marginally more confident on the disinflationary process and cooling in the labour market - especially given last week’s rise in the unemployment rate. On US CPI, NatWest US Economists expect core CPI (CPI excludes food and energy) to have moderated to 0.1% month on month, reducing the headline rate to 3.1% in June from 3.3% in May. This may bring downside risks to the USD.

French election serves coalition cocktail with a leftist twist

The French parliamentary elections delivered what markets and the NatWest European economics team had expected: a hung parliament. But the left coalition Nouveau Front Populaire (NFP) surprised markets and pollsters by emerging as the party with the largest vote share. NFP won 182 seats in the 577 - seat National Assembly, followed by President Emmanuel Macron’s centrist Ensemble alliance with 168 seats and Le Pen’s Rassemblement National (RN) in third with 143 - despite expectations of a relative majority for RN. The result leaves the euro area’s second largest economy in gridlock, with no single bloc near to having an outright majority.   

For the EUR, the election results are mildly negative, but far from the worst-case scenario for the common currency, in my view. The key focus over the coming weeks will be on the shape of the coalition government and if, or what, the political actors are willing to compromise on to form one. Optically, the position versus the UK is stark – a large parliamentary majority in the UK vs policy gridlock, which may lend support to GBP/EUR, in my view.  

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