Market Report 01-06-2022

Published: 01/06/2022 By ECAP

Sterling has generally found gains hard to come by in the past month, in large part due to the cautious stance on rates adopted by the Bank of England. Expectations that the UK economy may also lag behind some of its peers through to the end of 2023 has also weighed on the likes of cable. Last week’s UK PMI figures, which massively undershot expectations, will be revised in the coming days. Barring any surprises here, we could see sterling trade in a relatively narrow range, given the Jubilee bank holiday will cut the trading week two days short. Eyes are no doubt focused towards mid-month data releases where the Bank of England take centre stage once more.

With prices rising at an aggressive rate, and activity data largely holding its own, it's clear that the ECB’s highly accommodative policy settings are way out of whack with reality. Next week’s Governing Council meeting is almost certain to deliver a hawkish pivot, with markets eagerly awaiting details as to the possibile pace of policy tightening in the second half of the year. A first interest rate hike in July is now almost a done deal, with the real question to centre around the magnitude of the rate increase - 25 versus 50 basis points. Chief economist Philip Lane effectively confirmed this week that 25 bp moves in July and September would be the minimum, but the hawks in the council are likely to push for more, particularly given the strength of Tuesday’s inflation print.