News & Analysis


Yesterday’s session proved a quiet one as far as UK specific news was concerned, with no data releases of note in the calendar. In the absence of data, it was central bank commentary that captured much of the attention. This came chiefly in the form of a talk by Bank of England Governor Andrew, who delivered his comments at the British Chamber of Commerce Annual Conference. Bailey unsurprisingly played his cards close to the chest in the remarks, noting once again that inflationary risks continued to be skewed to the upside when compared with central BoE projections. This was reinforced by a restatement of recent communications, that: “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required”. Highlighted as they were in the context of a projection that undershoots the BoE target for inflation over the medium term, this in our view appears to justify a willingness to hold rates rather than a need to hike any further at upcoming meetings, but provides little in the way of new information for markets. Accordingly, the day was a quiet one for sterling as well with concerns elsewhere driving FX markets, leaving GBPEUR up 0.25% on the day and GBPUSD nudging up just 0.05%. The theme of central bank speakers is likely to once again dominate UK newswires today. Bank of England Chief Economist Huw Pill is delivering opening remarks at the CCBS Macro-finance workshop 2023 at 08:45BST, followed by Andrew Bailey, Ben Broadbent and Dave Ramsden who speak at the Treasury Select Committee hearing on Quantitative Tightening at 10:15 BST. Attention will once again be on the path for monetary policy, and in particular whether weak labour market data from earlier this week is beginning to shift the balance of risks for MPC members. We think it does, especially if accompanied by weakening inflation next week, but markets may well want to see those developments in hard data before really considering their pricing of the UK rates outlook.


With much of Europe benefitting from a public holiday today, news out of the eurozone looks likely to be limited once again, with little in the way of data to drive the euro. Of note on this front, however, was yesterday’s data out of France. This showed that unemployment dropped to 7.1%, in line with expectations. On the face of it a good sign, it is not necessarily what policymakers want to see when attempting to tackle high and sticky inflation. Labour market strength and robust wage setting is a factor that has increasingly entered recent communications from the ECB with more emphasis, suggesting a growing worry that high pay settlements could lead to an entrenching of inflationary dynamics. We may get to hear more on this point later today, with a speech by ECB Vice President Luis de Guindos on the cards. However, if it follows on from his comments yesterday, it may provide little insight as the high-ranking ECB official kept his cards close to his chest as he repeated the official stance of data-dependency and continued policy tightening.


With markets still fretting about the US debt ceiling, officials from both sides of negotiations struck optimistic tones in their external communications yesterday. Despite the vastly improved mood music, markets are yet to wholeheartedly buy into the idea that a bipartisan deal can be struck and legislated within the next two weeks, especially given how fractured the Republican majority within the House is. This meant that despite the improved risk backdrop, which is being displayed across global equities, FX traders are yet to turn constructively bullish on risk. As such, the markets underlying bullish view on the dollar remains intact. This is being displayed this morning, with the DXY index trading close to an eight week high as it sits just shy of the 103 handle. Today, initial jobless claims will be in scope in terms of economic data at 13:15 BST, while some focus will also sit on the next round of Fed commentary as Governor’s Jefferson and Barr are set to speak alongside Dallas Fed President Logan this afternoon.


Despite considerable volatility, the loonie strengthened by a quarter of a percent against the greenback on Wednesday, buoyed by rising equities following positive news on US debt ceiling talks, a $2 rally in crude, and an extension of the post-CPI tightening in Bank of Canada expectations. The loonie closed the day in second place on the G10 currency board, falling short of stronger gains in NZD. Following Tuesday’s inflation data, we conducted a thorough, systematic review of the data and Bank of Canada communications released after the April decision. With inflation reversing previous progress, further tightening of the labour market, rising corporate markup power, and robustness in overall economic activity, we think the case for a hike in June is now clear. The Bank of Canada actively debated a hike in April, and Macklem has repeatedly said that he is fully committed to getting inflation “all the way” back to 2%. With new data only bolstering the hawks’ previous views, we think they will win the argument this time, and expect the Bank of Canada to hike by 25bps in June, an off-consensus opinion. There’s still a risk that they wait for their Q2 business and consumer surveys, as well as the ability to use a monetary policy report and an immediate press conference to explain their decision in full—this may result in the Bank passing on June and hiking in July instead. Today, the main piece of information will be the BoC’s annual Financial System Review, which will highlight its views on the key financial risks and vulnerabilities to the Canadian economy.

FX Elsewhere

After surging on Monday following signs of improved Chinese demand for iron ore, the Australian dollar has consistently underperformed the G10 board with the exception of just NOK and SEK. Driving the renewed decline in the Aussie dollar has been a string of negative surprises in its labour market data. Yesterday’s Q1 wage price data undershot expectations by 0.1 percentage points with a reading of 0.8% QoQ, while April’s employment data released overnight showed the unemployment rate ticking up 0.2pp to 3.7% and the overall level of employment falling by 4,300 jobs. More importantly, however, is the distribution of employment as most of the jobs added were in part-time roles. In comparison, full-time employment declined 27.1k on the month. This doesn’t bode well for those analysts seeking a further hike from the RBA at their June 6th meeting, with the pricing out of expectations weighing on the Aussie this week.



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