Published: 09/06/2022 By ECAPUncertainty surrounding UK PM Boris Johnson has not had any real impact on the pound so far this week, which appears largely resilient to the prospect of a possible change in Tory leadership. Johnson survived a vote of no confidence on Monday evening, although it was far from a decisive victory, with 148 Conservative MPs (41% of the total) voting against his leadership. Potential changes in leadership are generally far from conducive of currency strength, although markets think that expectations that a new Tory Prime Minister would likely maintain a similar fiscal stance has limited downside in sterling. An upward revision to the UK PMIs for May has also helped the pound on the its way so far this week. The upward revision to the services index (to 53.4 from 51.8) is a particularly pleasing development, and should help calm concerns that a sharp slowdown in UK growth is imminent. The big question is whether this will be enough to allay growth concerns within the Bank of England’s MPC - we’ll find out next Thursday.
EURUSD has rebounded in the last two days, partly in response to yesterday morning’s Eurozone GDP figures, which were much more impressive than first anticipated. According to the revised data, the Euro Area economy expanded by 0.6% quarter-on-quarter in Q1, a welcome upward revision from the 0.3% initial estimate. Expectations that the European Central Bank will deliver a hawkish pivot at its policy meeting later today has also supported the common currency.
The only real question heading into this week’s meeting is not whether or not the Governing Council will raise interest rates in July, but by how much. Financial markets see at least a 25 basis point move as a bare minimum following Lagarde’s recent hawkish remarks, although there appears to be a growing consensus that a larger move could be on the way at future meetings. We suspect that most policymakers will support a smaller rate increase to begin with, although we believe that most will be open to discussing 50 basis point hikes beyond July, possibly in September. Should the ECB indicate in their rhetoric today that larger hikes are possible later in the year, this would be seen as a clear bullish signal for the euro.