Negative interest rates not being considered
UK labour market data generated a mildly positive impact on Sterling as it alluded to labour-market resilience.An investment banking survey showed the allocation of UK equities in global funds hit the highest level since 2014; suggesting strong underlying demand for UK assets. The Pound pushed above 1.4200 against a weaker Dollar, but the Euro found support below 1.1630.
Caution lingered over domestic coronavirus developments and the potential delay to further lockdown relaxation. Although markets still expect the economic recovery to continue, higher covid transmission rates could impact that.
Andrew Bailey, Bank of England Governor, stated that negative UK interest rates were no longer being considered. He further commented that much of the current inflation increase was due to energy prices and therefore should be transitory. The Pound drifted just below 1.4200 by the New York close with the Euro just above 1.1630.
Headline UK CPI inflation increased to 1.5% in April; in line with forecast and the core inflation rate increased to 1.3% from 1.1%. Sterling opened just below 1.4200 to the Dollar and 1.1600 to the Euro.
US housing starts declined to an annual rate of 1.57mn for April from 1.73mn the previous month and well below consensus forecasts of 1.71mn with some evidence of higher lumber costs undermining activity. Building permits were little changed at 1.76 mn for the month and marginally below market expectations.
Minutes from May’s Federal Reserve policy meeting will be released later in the day and markets will parse the rhetoric very closely with a particular focus on inflation comments and the underlying debate surrounding any potential timetable for tapering bond purchases. More hawkish rhetoric within the minutes could provide an element of dollar support with the equity market reaction watched closely. Overall market volatility is liable to increase as the inflation debate intensifies.
The Euro is holding on to previous day’s gains overnight against the Dollar with the pair continuing its move higher from previous lows of 1.1985.
As of writing, the single currency trades just over the 1.2225 as the depreciation in the US Dollar keeps the Euro buoyed.
Data to watch
07:00 – GBP – CPI
09:00 – EUR – ECB Financial Stability Review
15:30 – USD – Crude Oil Inventories
19:00 – USD – FOMC Meeting Minutes