Global Themes

BOE to shape Sterling
- BOE outlook should shape long-term Sterling view 
- Dollar rally shows no sign of slowing 
- Euro slides against peers

GBP

BOE outlook should shape long-term Sterling view
This week could be the most critical week we will see for Sterling so far this year because of the Bank of England (BOE) interest rate decision on Thursday.

The probability of an interest rate rise is now only at 12.11% (source: Reuters). With UK wages outpacing inflation and a disappointing Q1 GDP number, this combined effect has decreased market sentiment that an increase to 0.5%, for the first time in a decade, would happen. It has been a clear message from market participants, as GBP/USD now sits in the $1.35 handle. No rate hike looks firmly priced in, but what will be important to Sterling's next move is how the BOE approaches the announcement.

If we see a vote of 7-2 or lower, this will mean the dovish members of the Monetary Policy Committee (MPC) are clear in their conviction for there to be no rate hike. Anything lower than 7-2 will mean that the two hawks, who have been arguing for a rate rise, have now taken a step back as well, which could see the British Pound suffer further losses. The only way the pound will be able to get some respite and potentially rebound will be if the bank states that this doesn’t rule out a rate rise further down the road in 2018, and highlight what economic data they will closely monitor for this. If the bank links it to seeing an increase in GDP in future quarters or more certainty in Brexit talks though, investors could also pull away from the pound further.

Brexit talks appear to have a hit a wall, as talks last week between Prime Minister Theresa May and the cabinet on the best course for the customs union appear to have broken down. There has been growing pressure from the House of Lords to set out a plan for how this will be resolved, but talks don’t look like they will move on this week, with the matter not set to be discussed at this week’s cabinet meeting (source: Guardian).

USD

Services data sends Sterling lower
The US Dollar’s positive run continues with the index (a measure of the US Dollar against a basket of other currencies) peaking at a 4½ month high yesterday.

The rally saw the dollar gain against most of its respective opposites such as the pound and Japanese Yen. In an interview with Bloomberg, J.P Morgan’s CEO stated that inflation and the overall health of the US economy could continue to rise. Positive data could prompt the Federal Reserve (Fed) to raise interest rates quicker than currently forecast. This could prompt the US 10-year yield to rise further, possibly hitting the 4% mark.

EUR/USD printed fresh 2018 lows, falling to $1.1896 before bouncing back above the $1.19 handle this morning. The pair has recorded its 3rd consecutive week of losses, a feat not seen since Q1 2017. The Fed futures, shown on CME, have fully priced in an interest rate hike from the central bank in its next meeting, set to take place on the 13th of June (source: CME).

US President Donald Trump is to decide on the international nuclear agreement with Iran and whether to withdraw US support for it, the markets view this decision as a short-term risk based event (source: Reuters). The President is set to make an announcement on the matter at 6:00pm this evening.

EUR

Euro slides against peers
The Euro weakened yesterday against both the US Dollar and Sterling. The Euro weakened over half a percent against Sterling from €1.1310 to a high of the €1.1390. This morning’s German industrial output came in higher than expected, at 3.2% for April, rather than the expected 3%. As a result, GBP/EUR has retraced back towards the mid €1.13 handle.

Italian President Sergio Mattarella called for the countries parties to rally behind a “neutral government”, saying the only alternative would be a swift re-vote after March’s inconclusive election (source: Reuters).  The Five Star Movement and the Center-right parties yesterday rejected the idea of an interim government, raising the likelihood of a re-election. Continued political woes could have a further impact on the Euro and could see it weaken further.




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