The slew of UK data and survey releases last week all but sealed another 25 basis-point hike from the BoE (Bank of England) at the May monetary policy committee meeting. A combination of stronger employment, average earnings, consumer price inflation, GfK (Growth from Knowledge) consumer confidence and CIPS (Chartered Institute of Procurement and Supply) PMI (Purchasing Managers' Index) surveys outweighed the ongoing weakness in retail sales volumes, which dropped more sharply than expected in March.

However, taking a closer look at the data, there were other signals that indicated a rate rise from the BoE is not a forgone conclusion. Producer price inflation has stagnated over the course of recent months, and output prices are just under 3% below peak levels recorded in the summer of 2022. The employment figures reported a significant reduction in full-time employee headcount, more than 100,000 fewer than the peak of last year, despite a notable increase of almost 170,000 in the headline employee numbers and a recovery in full-time employees from the previous month's reading.

The markets are pricing in the vast majority of a 25-basis point rate rise at next week’s meeting, so it is unlikely that the GBP will rally further if the BoE delivers on those expectations. It was notable as well that the pound did not rally materially against the US dollar and fell back against the euro even after last week’s data and survey releases. Can the GBP rally from here? It is unlikely to do so independently, but the news from the US hasn’t been good either, so there is room for renewed upside there. I think it is harder to see a sustained move higher in GBPEUR, given the interest rate and macroeconomic backdrop. Overall, GBPUSD still faces challenges sustaining a break above the low $1.25's, whilst GBPEUR has found €1.1420/30 equally, if not more, challenging to hold above.

Already this week, the April German IFO* business climate survey reported a small improvement in overall conditions. There was a surprise improvement in the expectations component, while at the same time, there was an equally surprising reduction in the current conditions component. This has come swiftly after a surprise reduction in French business and manufacturing confidence, which was assumed to be reflective of the unrest in France, rather than a drop in underlying confidence - but what if it wasn’t? In the remainder of this week, there are further April confidence surveys from Italy and Euroland, French and German consumer prices for April, and provisional Q1 GDP figures from France, Germany, Italy and Euroland. These are likely to record a limited improvement in confidence, no additional reduction in inflation rates, and a small positive bounce in Q1 economic activity. These are unlikely to make any material difference to the European Central Bank’s thinking, and may even support a more aggressive monetary tightening in the eyes of the more ‘hawkish’ members of the Governing Council. Overall, the risks regarding the ECB’s (European Central Bank) next move on interest rates lie between a 25 or 50 basis-point hike. I think they’ll act cautiously and only raise by 25 basis-points, but the markets aren’t likely to reduce expectations of additional hikes thereafter, even if they do, in my opinion.

The EUR has risen back above $1.10 in early trade on Monday. Can the EUR sustain these gains? It may depend more on what we hear from the US and the issues that continue to dominate there. I’m not convinced that EURUSD will sustain these gains on the back of domestic data and events alone, but I think there is a chance that the economic situation in the US continues to worsen, and that offers the EUR additional temporary support.

* Information and Forschung / Germany’s Institute for Economic Research

Over the course of the past few weeks there have been increasing signs that the US economy is slowing, the surveys recording evidence of businesses in difficulties, reports of commercial real estate failures spreading across the US, and the inflation data has pointed to a weakening in headline pressures. Does any of that matter though? The markets price in a very high likelihood that the Federal Reserve will hike again next week, and this week’s spate of secondary releases and the Q1 GDP figures aren’t likely to offer anything to materially alter the decision that the Federal Reserve settles on. It still seems likely to me that the upcoming decision will be the last time that the Fed hike interest rates. I have highlighted numerous times in this, and in other publications, that they are not paying sufficient attention to the money supply data, the leading index (which fell sharply in March, to mark 12 consecutive falls), or the indicators, such as deposits data, which pointed to a renewed fall in commercial deposits in the week ending 12 April, versus the previous week when they rose slightly.

So the USD could face another week of pressure, having recovered a little bit towards the end of last week. The key risks for the USD though are different to the likes of the GBP and EUR, as the markets are pricing in a significant amount of monetary loosening in the second half of 2023. I think markets will be disappointed, and the impact of this on interest rate differentials could be sufficient to arrest the USD’s sell-off in the months to come.

This week’s key central bank meetings include the central bank of Hungary, Swedish Riksbank, and the central banks of Turkey, Russia and Colombia. Of these, only the Riksbank is expected to raise interest rates, which in my opinion is a clear indication that the Western central banks are now the outliers when it comes to monetary policy action. After last week’s inactivity from Bank Indonesia and the People’s Bank of China, and signs of disinflationary forces reappearing, is now the right time to be hiking interest rates again? Emerging markets appear to be saying no, collectively, and we have seen the currencies of those central banks which have tightened suffer versus others, for example the New Zealand dollar’s slide post the unexpectedly large tightening agreed by the Reserve Bank of New Zealand only a few weeks ago. The Riksbank is predicted to hike by 50 basis-points this time around, but could the Swedish krone suffer a similar fate to that of the NZD?