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GBP bounces back and mixed US data

Last week, BoE (Bank of England) Chief Economist Huw Pill appeared to downplay any near-term risks of monetary loosening. Pill highlighted the ongoing overshoot of services inflation and pay growth, suggesting that markets should not get overexcited about how headline inflation missing the 2% target over coming months may affect monetary policy. That, combined with some US data and survey releases that pointed in opposite directions, helped the GBP recover against the USD, and it outperformed the likes of the EUR and JPY. So is there further upside for the GBP, or are the FX markets nervously awaiting the results of the UK local elections, the Fed’s decision on rates, and April US non-farm payrolls data this week?

What will the Fed signal?

Persistent US inflation will be a problem for the Federal Reserve, in my view. Wednesday’s Federal Open Market Committee (FOMC) meeting will be accompanied by the usual Fed statement, which may be revised to say the timing of any reduction in monetary policy could be delayed by the lack of progress on inflation. The markets now expect less than 50 basis points (bps) of interest rate easing from the Fed this year, with the first cut set for September at the earliest. Also expected is the US April employment report. Non-farm payrolls continue to defy gravity and market consensus expectations are for another net 250,000 jobs to be added in April. However, despite the strength in employment, wage growth is expected to slow. So I think this release could complicate the USD reaction, as any initial move may prove to be a knee-jerk reaction.

In terms of other important releases this week, Euroland has Q1 output growth and provisional April consumer price inflation data due for release (Tuesday). The euro’s performance has been mixed of late, gaining one week against other majors only to soon return, as we saw over the past fortnight. This week, the EUR could benefit from better economic news, after the European Commission reporting a surprise dip in economic confidence courtesy of services and industrials.

Czech Republic central bank to cut rates again

Aside from the Federal Reserve’s FOMC meeting, the Czech Republic central bank and the Norges Bank (Norway) are holding meetings. The Norges Bank meeting is an interim meeting so it would be a shock if anything other than a no-change decision emerges from that. For the Czech central bank, however, ongoing improvements in the inflation outlook should spur decision-makers to cut interest rates by a further 50bps. There are risks to both sides of this, but given the progress made, and the downside risks to economic activity, cutting by more or less than this amount could have unintended consequences, in my view.

 

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