Last week saw significant developments, with some asset classes experiencing their largest price fluctuations of 2024. A combination of political turmoil in Europe, unexpected declines in US inflation, and hawkish signals from the Federal Reserve and the European Central Bank drove investors towards safe-havens like government bonds, the Swiss franc, USD and somewhat the GBP. The narrative of US disinflation is gaining traction among market participants as the consumer, producer, and import price indices for May all came in lower than anticipated.
The Bank of England (BoE) will be under scrutiny this week. While markets do not anticipate any policy changes from the BoE due to recent higher-than-expected inflation figures and the upcoming election in July, policymakers may use this meeting to prepare markets for a potential easing in August. Markets currently view the beginning of the easing cycle as more likely in November, with a possible rate cut in December. Attention will be on the number of officials voting for a cut this week (likely two) and whether Governor Bailey continues to push back against market expectations of minor policy easing this year.
This meeting occurs as the UK economy stalled in April, showing zero growth for the first time this year. While the services sector remains strong, declines in production and construction pushed GDP into negative territory for the month. Additionally, the unemployment rate reached a two-and-a-half year high just weeks before the general election. This economic weakness could prompt policymakers to consider easing rates sooner than the markets currently anticipate.
We view the meeting and a potential downside surprise in the UK CPI next week as potentially negative for GBP, this does not necessarily mean that GBP/USD and GBP/EUR will decline in the coming sessions. Domestic macroeconomic and monetary policy factors in the UK will be crucial but cannot be viewed in isolation. Economic data from the United States, such as the retail sales and industrial production reports, will also be key volatility drivers, and European politics is expected to remain the primary influence on GBP/EUR in the coming week.
