Global Themes

12pm today: Sterling awaits key UK rate decision 
- Critical day for UK as BOE decides
- When the dollar train moves, best to move with it 
- Italy stalemate coming to an end

BOE

Critical day for UK as BOE decides
It’s ‘Super Thursday’ today for the British Pound as the Bank of England (BOE) announces its interest rate decision at 12:00pm.

The BOE is widely expected to keep interest rates at 0.5%, but market participants will likely be scrutinising the longer term outlook from the Monetary Policy Committee (MPC) before deciding which direction to push the pound. GBP/USD is holding above $1.35 and GBP/EUR is in the €1.14 handle in early morning trading.

If the MPC suggests future interest rate rises will depend on economic data such as GDP growth, which came in at a disappointing 0.1% q/q last month for Q1, then Sterling could come under selling pressure, as confidence in the UK economy has waned. How the MPC interprets recent inflation data and wage growth will also be key. Interest rates going above 0.5% for the first time in a decade is seen as a key measure to bringing inflation towards the BOE’s target of 2%.

Yet we could see some MPC members pushing for a hike going forward, as fears that the economy couldn’t handle higher interest rates have lifted with wage growth now rising above inflation. This second scenario would be a key Sterling positive going into quarter three as it would keep hopes alive for a change in policy sooner rather than later. Separately, there are two data releases at 9:30am ahead of the BOE decision.  

USD

When the dollar train moves, best to move with it
Since the start of 2018, EUR/USD took 34 days to climb to a fresh 3½-year high of $1.2550.

Since then the pair stuck to a tight trading range and for the better part of Q1, the pair saw the majority of its price action between the $1.22-$1.24. Then on the 19th of April, markets saw EUR/USD plummet nearly 5% in 14 days to new 2018 lows. The difference in moves highlights the market's appetite when it comes to selling the US Dollar and the Euro, and how quickly sentiment can change.

The move in GBP/USD, seen at the start of the year, witnessed a 6.2% rally over the course of 18-days. However, this is no match for the sell-off we have seen recently, which resulted in a 6.2% dive in just 13-days, taking us from above $1.43 to where we are now near $1.35.

Large FX Options contract expiries today could see some USD price action occur around 3:00pm, should market participants wish to defend certain levels. This afternoon sees the US CPI inflation number for April released at 1:30pm. The forecast is expected to see the number rise to 2.2% from 2.1% y/y, in contrast to yesterday’s fall in PPI.

Italy

Italy stalemate coming to an end
Nine weeks on from the hung parliament of March 9th, Italy looks set to form a coalition government today.

Yesterday, news broke that the 5-Star Movement and the far-right Northern League moved closer to securing a coalition government and breaking the political deadlock. An announcement is expected today to formally introduce the new government in Italy.

Thus far market reactions to the news have been muted; however, market participants could be waiting for the longer term impact on Europe, with this adding to the fears of a rise for far right support across the Eurozone. 




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