Less dovish MPC minutes should follow upbeat Inflation Report
Last week’s Quarterly Inflation Report was decidedly positive, pointing to an earlier than previously expected return to the 2.0% inflation target on a two year horizon. The outlook for growth was also brighter, with near-term Q2 projections of 0.5%. With UK unemployment data impressing once again last week, there is plenty of positives for the BoE to focus on and this has been reflected within the latest speeches from MPC policymakers.
We expect this Wednesday’s MPC minutes to reveal a less dovish shift in the voting pattern away from QE, with perhaps Governor King the most likely candidate to swing his vote. With King stepping down from his position in just over a month’s time, an abandoned QE vote from him is unlikely to be a major source of strength for the pound. However, we do expect growing optimism over UK growth to be evidenced in the minutes and this should bolster market confidence that any plans for QE have been shelved for the foreseeable future.
UK data this week should confirm a drop in domestic inflation, which can be negative for a currency but is unlikely to be for sterling this week. There may be more room for manouvre on the inflation front (in terms of more QE) but the uptrend in growth should trump this. Not much is expected from Wednesday’s retail sales figure and on Thursday we should see the UK’s Q1 GDP figure confirmed at 0.3%. This should make the BoE’s recent 2013 GDP forecast of 1.0% uncharacteristically feasible.
All eyes on Bernanke and Fed minutes
Ben Bernanke testifies on Wednesday and his comments will be put under the microscope as the market continues its constant evaluation of the future of US monetary policy. Most of the talk out of the Fed last week was of the hawkish, anti-QE3 persuasion and this got the market thinking the Fed is edging towards tapering off QE3. However, Bernanke has time and again put the dampeners on such speculation and we suspect the same could be true again on Wednesday. There remains plenty of reason for caution, as US growth figures still lack consistency. Bernanke could well take some of the sting out of the dollar’s recent rally with more “wait and see” talk, but there is a good chance that talk of QE3 tapering within the Fed minutes could have the final say by spooking investors and giving the dollar another lift.
Eurozone growth disappoints as PMIs come into view
Last week’s eurozone GDP figures for the first quarter were reliably concerning, with France confirming an double-dip recession and German growth significantly undershooting. April’s monthly PMI growth figures will be released on Thursday morning and while a minor lift is expected, these updates invariably highlight the weak state of eurozone growth and more often than not disappoint. The euro decline that has characterised the past few weeks (albeit losses against the pound have been limited) looks set to be resumed before too long.
End of week forecast
GBP / EUR 1.1875
GBP / USD 1.5175
EUR / USD 1.2780
GBP / AUD 1.55
Sterling/euro has started the week very slowly with much of the eurozone on bank holiday. We remain comfortable with higher targets than the current price of €1.1835 but we are resigned to having to be patient for sterling gains. GBP/USD remains vulnerable against the dollar, which has been a top performer in recent sessions. Any sterling rallies will likely be sold against the dollar. As for EUR/USD, the year-to-date low around $1.2750 still looks set to be breached on the downside, perhaps by the end of this month.
Richard Driver
Caxton FX
