Major central banks need data to behave before cutting interest rates

Last week saw the Bank of England (BoE) leave monetary policy unchanged, but Governor Andrew Bailey hinted that the June meeting was not a forgone conclusion either, whether for a rate hold or a reduction. This was slightly surprising, since the Bank updated its own projections for growth and inflation and these did not appear to indicate any urgency for major monetary policy adjustments.

This week is likely to see FX markets focus on UK labour market data for March/April on Tuesday, followed by US releases of consumer prices and retail sales for April on Wednesday, and industrial production for April on Thursday. If there is a realistic prospect of an interest rate cut from the Bank of England at the June meeting then the average earnings and employment figures for March will either add weight to the argument, or undermine it fatally, in my opinion.

As for the US releases, if there is any additional stickiness in US Consumer Price Index (CPI) inflation, strength in retail sales or stronger than expected industrial output then the prospects of a further delay in the timing of the first US interest rate cut will increase, in my opinion. For current planned reductions in interest rates, or any reversal of the recent trend of fewer rate cuts being priced for, the economic data releases have to behave, and by that I mean show signs of additional inflation reduction.

Might currency ranges finally be altered?

Over the past week or so FX markets have shown few signs of wanting to test or break recent ranges. GBPUSD has slipped back into a $1.24-1.28 trading range, GBPEUR doesn’t look like it wants to spend much time below €1.16 or above €1.175 and EURUSD’s attempts at a significant test above $1.08 have looked feeble. Are we back to the same range trading that we saw for the bulk of the first four months?

Perhaps the markets should be less sanguine. There are definite signs of a macroeconomic shift elsewhere, and the geopolitical risks have not faded in the way those in Western politics might have hoped for. Risks to both sides of these ranges remain, but for the EUR and GBP the macroeconomic challenges appear to be increasing rather than diminishing, in my opinion.

A look at some recent headlines suggests instability rather than stability. Over the weekend Russian President Vladimir Putin replaced his Defence Minister Sergei Shoigu, who has been a long-standing ally, amid a larger cabinet reshuffle, while fighting in Kharkiv, Ukraine’s second largest city, remains intense. Pressure on the Israelis to search for a ceasefire has increased, but the Israeli government is resolute in continuing its war against Hamas. Meanwhile, NATO countries continue to watch with concern at the rise in tensions between China and Taiwan. Markets are perhaps overlooking the ongoing individual and collective risks these situations pose to global supply chains and inflation, in my opinion.   

Central banks – secondary central banks providing a roadmap for major central banks?

Last week saw the Riksbank (Sweden), Bank of Brazil and central bank of Peru all ease monetary policy as the threat of inflation recedes and the prospects of macroeconomic weakness increase. There is significant room for further easing from the Bank of Brazil without the Federal Reserve cutting, but for Sweden and Peru I think there is far less room for manoeuvre. However, these central banks are suggesting that there is a roadmap for major central banks to ease policy, provided the signalling is comprehensive. There are no significant central bank meetings this week.

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