FX Update: Bank of England in the hottest of seats after another hot core UK CPI reading. FX Update: Bank of England in the hottest of seats after another hot core UK CPI reading. FX Update: Bank of England in the hottest of seats after another hot core UK CPI reading.

FX Update: Bank of England in the hottest of seats after another hot core UK CPI reading.

John Hardy

Head of FX Strategy

Summary:  The UK reported a fresh cycle high in core inflation, pressurizing the Bank of England decision and guidance at tomorrow's meeting. Interestingly, UK yields and sterling trade lower today after the CPI print. Elsewhere, the Aussie continued its steep retreat, with pressure on the metals complex likely weighing. Today sees the first of two days of Fed Chair Powell testimony, but will he bring anything new to the table after his "data dependent" declaration at the most recent FOMC meeting?

Today's Saxo Market Call podcast

FX Trading focus:

  • Three central bank meetings tomorrow from Bank of England, Swiss National Bank and Norges Bank - all with the size of the rate hike in question
  • Another hot core UK core CPI print today, and yet sterling off - market seems worried that BoE can't deliver what is expected.

Thursday's CB decisions: a reacceleration in hike expectations?
The RBA minutes stating that the latest rate hike was "finely balanced" suggest that the RBA will be in pause mode again at the July meeting and have helped drive the recent AUD consolidation (next key is the 0.6700 area and just below) Elsewhere, there is plenty of fuel to drive an acceleration of rate hike expectations, even if today's reaction to the hot UK CPI data (weaker sterling and the inability to stick new highs in UK short yields even if yields did rise from yesterday's lows) does suggest that the bar is quite high for a hawkish surprise from tomorrow's Bank of England decision. Norges Bank and Swiss National Bank tomorrow could also round out whether the recent shift toward more hawkish expectations is confirmed in both the decision and guidance at the three G10 central bank meetings tomorrow. some more thoughts below on each of the three meetings.

Otherwise, perhaps the most interesting thing to note is the very strong level of risk sentiment across global markets as we note in today's Saxo Market Call podcast. That generally supports a weaker USD in reflexive fashion, but we need a "refresher" wave of USD weakness to suggest the prior one hinted at a more profound sell-off is underway. The first of two days of Fed Chair Powell testimony are set for today before a House Panel, but Chair Powell may not have much on his mind besides his "data dependent" message as per the last FOMC meeting's press conference.

Bank of England
Bank of England: the last two shocking core inflation and very positive revisions to alarming April labor market data have all come since the prior Bank of England meeting and have taken forward Bank of England hike expectations skyward, with a full 150 basis points priced in through early next year, which would mean a Bank of England would have to take the policy rate close to 6.0%. Governor Bailey has shown a reluctance at every turn to turn fully hawkish, but this data is so stark, requiring a strong response, that we have to expect that the BoE does what it can to claw back as much credibility as it can, or else. Finger pointing and a small hike could prove devastating for sterling. In short: the market has already priced 90 basis points through the next three meeting, so to clear the expectations bar, the BoE may need to hike 50 points and hawkish guidance to support sterling again. Today's sterling weakness shows doubt at the margin, perhaps justifiable, that the BoE will struggle to deliver.

EURGBP rallying sharply today despite hot new UK inflation suggests that the Bank of England has a lot to deliver to support the bullish sterling case. There is plenty of room for this pair to consolidate higher without reversing the down-trend, but 0.8675 possible begins to stress it badly. The market will be very reactive to tomorrow's Bank of England meeting.

Source: Saxo

Swiss National Bank
Remember that the SNB meets only quarterly. The market is divided on whether the bank will hike 25- or 50 basis points tomorrow, with the latter considered possible as a way to buy insurance for the long wait until the September meeting, while a smaller hike seems justified by inflation falling back just enough over the last two months to take it to 1.9% at the core for May. The SNB is generally a follower and not a leader in hiking, but we could see everything from a smaller hike with  a bias to tighten further if necessary to a larger hike with a bias to pause. 

Norges Bank
Short Norwegian rates are at the highs for the cycle ahead of the Norges Bank meeting tomorrow, with a slightly majority anticipating an acceleration of the pace of hiking to 50 basis points, taking the rate to 3.75% if they do. The last two months of accelerating core or "underlying" CPI prints have to be a concern. Guidance on further plans also critical. Constructive on Norges Bank's intention to deliver and support NOK here  - with EURNOK and USDNOK both at more interesting levels for testing the bear case after the recent large sell-off before this retracement suggested a top may be in place for these two pairs.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1230 – Czech National Bank Rate Announcement
  • 1230 – Canada Apr. Retail Sales
  • 1400 – US Fed Chair Powell testifies before House Panel
  • 1700 – US Treasury auctions 20-year bonds
  • 1730 – Bank of Canada meeting minutes
  • 2130 – Brazil Selic Rate Announcement
  • 0130 – Bank of Japan’s Noguchi to speak


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