Bank of England Likely to Pave the Way Towards a Rate Cut in the Summer
The Bank of England (BoE) is likely to keep rates unchanged when they meet next week but their messaging will be eagerly anticipated as conditions for a rate cut appear on the horizon. In April, inflation dropped encouragingly but was unable to match lofty expectations. The most recent jobs report also highlighted some nervousness in the labour market with more a flurry of claimants (for unemployment benefits) being registered in May (50k+).
UK growth remains anaemic, with the economy stagnating in April with a print of 0% growth for the month. One sticking point for the BoE is inflation and more importantly services inflation which remains an issue. Average earnings has also proven to be sticky, failing to drop in the three month period ending in April when compared to the prior three months but this is less of a concern according to the BoE and their analysis. A move lower in services inflation would be a step in the right direction.
Cable had a volatile week, driven almost entirely by top tier US data (US CPI, FOMC forecasts). The welcomed inflation data on Wednesday and subsequent rise in the pair was pulled back a few hours later with more hawkish revisions to the inflation outlook. Since then FX markets have prioritized the hawkish projections over the encouraging inflation data – the reverse of what has been seen in the US stock market as major indices achieved new all time highs. Continued progress in inflation and a more dovish BoE could extend the current move lower, towards 1.2585 and possibly even the 200 SMA.
GBP/USD Daily Chart
Source: TradingView, prepared by Richard Snow
Markets Anticipate another 25 Basis Point Cut from the SNB
After surprising markets in March with 25 basis point cut, the Swiss National Bank (SNB) will meet again in the coming week and potentially lower the policy rate once again. Switzerland has managed to bring headline inflation down to just 1% in March, since then it’s been 1.4% but remains very low compared to other developed nations. Markets factor in a 72% chance of a rate cut in the coming week.
Market-Implied Rate Probabilities
Source: Refinitiv, prepared by Richard Snow
A major risk to the market view appeared when the SNB Chairman mentioned that the greatest risk to the inflation outlook is a weak Swiss Franc. His comments immediately saw the currency strengthen. GBP/CHF approaches 1.1245 with the potential to test the 200 SMA. The blue 50 SMA appears as dynamic resistance.
GBP/CHF Daily Chart
Source: TradingView, prepared by Richard Snow
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