Published: 25/04/2022 By ECAPWeak numbers across the board last week helped sink the pound below the 1.30 level against the dollar. Retail sales, consumer confidence, and the PMIs of business activity were all weaker than expected, and the Bank of England´s muddled communications about its response to the inflationary wave are not helping. We note, however, that the PMIs are still consistent with strong growth and the economy is at or very near full employment, and we regard the latest move lower in sterling as a significant overreaction. This week sees no significant macroeconomic news and the Bank of England has entered its pre-meeting blackout period, so expect the pound to trade off events elsewhere.
Now that a 50 basis point hike is more or less priced in, not just for the next meeting of the Federal Reserve, but also the following two, some Fed officials are bringing up the possibility of a 75 basis point hike. We have been banging the table that markets were not pricing in sufficient Federal Reserve hikes for well over a year, but we think we are getting close to the point where enough is being priced in for the near term, and further increases in US bond yields should be limited to the longer end of the interest rate curve. For now, at least, the short-term rate differential between the US and the Eurozone appears to be stabilising, which means the dollar rally against European currencies may run out of steam soon.