PMI numbers from the EU, UK, and the US yesterday all followed a similar trend where there seems to be a divergence between the activity in the manufacturing sector and the service sector. The big takeaway from the data was that for services, demand remains strong and thus will be concerning for the ECB, BoE, and the Fed, therefore keeping up the pressure for more hikes.
US treasury yields continued to climb yesterday, adding support for USD.
UK inflation continues to be sticky with this morning’s numbers all coming in higher than expected. Year-on-year prices dropped to 8.7% versus 8.2%, month-on-month came in higher at 1.2% vs 0.7% and core CPI came in higher at 6.8% vs. 6.2%.
What does this mean for markets? Well, the BoE has more to do, and markets have now added an additional 0.4% worth of rate hikes by year-end which could see peak interest rates rise to as high as 5.5%. GBP is on the up this morning as a result.
* Daily move - against G10 rates at 5:00pm, 23.05.23
** Indicative rates - interbank rates at 5:00pm, 23.05.23
This morning’s UK inflation numbers came in higher than most economists were expecting, and the surprise factor is keeping GBP on the up early doors on higher rate expectations. GBPEUR has made a new five-month high as a result, and buyers of EUR who wish to take a risk could look to target the highs we saw on the 1st December, which is roughly 1.3% higher than current levels. Most GBP pairs are trading near recent highs, and looking at the GBP index we stay near 1-year highs. Governor Bailey will be speaking twice today, and no doubt will be questioned on today’s numbers.
For the rest of the day we have German IFO surveys, and in this evenings minutes from the latest FOMC meeting we’ll be looking out for any hawkish notes to back the continued easing in the markets of Fed rate cuts.
Despite headline inflation continuing to drop off from double digits, inflation is not dropping fast enough and core inflation continues to rise higher. Versus the EU and US inflation numbers you can see clearly below there is a lot more work to do by the BoE, and it's no surprise to see markets add to rate hike expectations across this year. For perspective, markets see peak rates in the UK near 5.50%, Europe at 3.75%, and US rates around 5.25%. The next BoE meeting is on the 22nd of June, and the day before we have another inflation reading. Until then, GBP seems likely to remain well supported.
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