The pound edged modestly higher verus its peers on Wednesday as investors bet on a potentially hawkish message from the Bank of England this afternoon.
The real topic of discussion for investors will be the timing for future rate hikes. So far, policymakers have drawn the line at giving any concrete signals as to when this may occur and we expect that to be the case again this time around. A surprise hint that higher rates may be forthcoming as soon as 2022 would, however, likely jolt the market and provide good support for sterling. Yet, with the market already pricing in the first hike as soon as August 2022, we think that such a move would likely be of a relatively contained nature.
Fed Chair Powell calms US interest rate hike expectations
Elsewhere, the market has had a number of Fed member speeches to digest this week. Some have echoed last week’s official communications, namely members Bullard and Kaplan that have warned sooner-than-expected rate hikes may be needed to rein in rising inflation. Yet, there appears a clear divide within the FOMC, particularly after comments yesterday from chairman Powell, who appeared to backtrack on some of last week’s hawkishness. Powell calmed that market by stating that a rapid rise in US inflation similar to that of the 1970s was ‘very, very unlikely.’ He also noted ‘we will not raise interest rates preemptively because we fear the possible onset of inflation. We will wait for evidence of actual inflation or other imbalances.’ This confirms our initial view that the market reaction to last week’s Fed announcement was overdone and that, in reality, the bank still remains some way off from normalising monetary policy.
The softening in policy stance from a number of FOMC members this week has been enough for the dollar to ease from its highs of late-last week. Disappointing PMI data out yesterday afternoon has also far from helped the greenback. The preliminary services PMI for June from Markit slipped to 64.8 from 70.4, well below economists’ expectations. While still comfortably in expansionary territory and its second-highest level on record, this is perhaps an early warning sign that activity levels may be starting to plateau following the sharp expansion witnessed since the beginning of the year.
Revised first quarter US GDP data out this afternoon is unlikely to shift the markets, but the May durable goods order data might. As mentioned yesterday, if we continue to see signs of a converging in economic performance between the US and Euro Area, then we may get a bit of upside support for the euro versus the dollar in the coming weeks.