Bank Of England Rate Cut Odds Slashed

GBP/USD rate holds unshaken by election announcement

Pound Sterling rallied after it was reported UK services inflation rose 5.9% y/y in April versus the 5.4% forecast. The significant upside miss means inflation will unlikely fall to the Bank of England's 2.0% target on a sustained basis. Economists at Deutsche Bank have revised their inflation forecasts as a result, saying headline CPI is now expected to track around 2.6% y/y (previously: 2.3%) to end the year. Such developments are not consistent with a June interest rate cut at the Bank of England. In fact, the market is now only 80% priced for a full 25 basis point cut to have been delivered by September. The market's shrug to Prime Minister Rishi Sunak's announcement suggests the UK has entered a more stable political era, which can allow the Pound to continue to focus on mildly supportive economic developments. Analysts at Barclays and Rabobank say the prospect of political change could, in fact, provide mild tailwinds for the UK currency.

No Major Data

Germany PMI's in question

Eurozone surveys have generally pointed at improving sentiment of late, and today’s PMIs will be closely watched to gauge whether the growth outlook has continued to rebound. German PMIs will be released before the Eurozone-wide figures this morning, and are expected to show a more gradual improvement in both manufacturing and services. The manufacturing sector, however, remains deep into negative territory, both in Germany (now at 42.5) and in the Eurozone as a whole (now at 45.7). Consensus for Eurozone PMIs is also for another uptick, with the composite index seen rising back to 52.0 and almost entirely erasing one year of sluggish prints. The Euro has shown a tendency to move on growth differentials when these comparable surveys are released. As mentioned above, we see some upside risks for EUR/USD today as Eurozone data may look brighter than in the US. Another important release today will be the first quarter European Central Bank negotiated wage index. This was seen as the make-or-break data point for a June rate cut some months ago; now, ECB communication leaves little room to doubt a June move. At the same time, there is a major uncertainty around the path for monetary policy beyond June, and German wage figures published yesterday were stronger than expected.

Major Data:

Germany HCOB Manufacturing PMI: 45.4

Germany HCOB Services PMI: 53.9

France HCOB Manufacturing PMI: 46.7

France HCOB Services PMI: 49.4

Minutes boost may not last

The 1st of May FOMC minutes, released yesterday, surprisingly on the hawkish side and bolstered the Dollar. While the general view was that policy was “well positioned”, many members were open to more hikes if needed. Incidentally, “many” participants questioned whether policy was restrictive enough. All this must obviously be weighted for the hot March inflation and jobs market prints. We have heard from some hawkish members (like Neel Kashkari and Chris Waller) about lingering concerns on inflation even after the more encouraging April data, but it is reasonable to expect the general FOMC sentiment to have turned generally less hawkish since the May meeting. Today, we see risks that the Dollar will give up some of its gains as PMIs are released in the US and Eurozone. Given indications from other surveys, we see some possibility for Eurozone figures to paint a relatively more encouraging picture than in the US.

Major Data:

Initial Jobless Claims(May 17): Exp, 220k

Fed's Bostic speech