A hawkish surprise cannot be ruled out (or in)
There is an air of uncertainty surrounding today’s ECB meeting. However, before we deal with that particular statement, let’s deal with the bits that we think we know might happen first. The ECB look likely to signal an end to APP purchases, either at the end of this month or very early in July, as well as confirm that the TLTRO-III discount will not be extended beyond the end of this month. Whilst the delay in ending APP until then may sound like an unnecessary one on the part of the ECB, that may be down to the ECB maintaining their ongoing promise to keep with forward guidance, even if that guidance is only slightly forward. So to speak.
25 or 50 in July?
The uncertain bit that splits markets (and the ECB) centres around the size of their first hike in July. Whilst Madame Lagarde has previously implied that the ECB will start hiking slowly, which lends itself toward a 25bps move, the surging inflation in the region has seen a slew of ECB officials argue for a bigger, 50bps hike, which would follow the likes of the Fed, BoC, RBNZ and the newly-hiked RBA. If forward guidance makes things as obvious to markets as it is down at the Fed, then we should expect Madame Lagarde to give markets a clear signal. We hope.
What about the EUR?
The single currency has fared well of late, with EUR/USD moving back toward the key 1.0750 resistance level through yesterday. Stronger growth figures in the region, announced yesterday, with a 0.6% (QoQ) expansion doubling estimates helped to fuel that particular rally. GBP/EUR dropped back under 1.1700, further highlighting the strength of the single currency. Going forward, the EUR is sure to react to today’s ECB meeting, with heightened volatility expected if there are clear and positive signs of a 50bps hike in July.
Steady dollar gains
The dollar had been witnessing a mixed performance so far this week. Maybe Friday’s impending U.S inflation has encouraged a larger band than normal to sit on the fence. However, mild risk aversion has encouraged reasonable dollar strength over the past day, with USD/JPY leading the pack and breaking above 134.00 for the first time in 2 decades. USD/CAD also probed higher overnight, after moving within 100 pips of the cycle low previously. GBP/USD has consistently found it challenging to break above 1.2600, whilst also finding decent support below 1.2500.
UK growth set to slowdown next year
The latest projections from the OECD imply that UK is likely to witness virtually non-existent growth throughout next year, perhaps being the 2nd worst performing G20 leading economy, with only Russia faring worse. In rather sombre reading for PM Johnson and his government, high inflation, tax rises and further increases to the cost of living, are likely to be the key drivers to that reduced economic outlook, marking the UK as a real underperformer according to the OECD.
What makes the UK so uninspiring?
Whilst it is fair to say that most countries in the developed world are suffering from the impact of surging inflation, and are also raising interest rates (some at a faster pace than the UK), which is clearly putting a massive squeeze on real household incomes, what sets the UK aside is the projected round of tax rises, which would dampen both personal and corporate activity even further. Throw a bit of Brexit and negative impact to manufacturing from supply chain issues into the mix, and that all adds up to a rather negative growth outlook.
BoE set to hike further
The OECD also still expect the BoE to raise UK interest rates from the current 1% level to 2.5%, driven by their need to combat surging inflation. Indeed, unlike most developed economies (bar the U.S), there has actually been an increase in analyst expectations for inflation in the UK, or what they deem as an ‘upward drift’. Groovy.
What else is happening today?
USD Weekly Initial jobless claims/Continuing Claims
CAD Financial System Review
NZD Electronic Card retail Sales, Manufacturing Sales