ACM Update 05-05-26
The final days of April were dominated by major central bank meetings, all of which ended up in a hold of interest rates. The Federal Reserve’s vote was the most contentious, with the highest number of dissenting committee members since 1992.
This week will see the latest set of employment figures from the US, culminating with Non-Farm Payrolls on Friday afternoon. There will also be a scattering of speeches from Federal Reserve, ECB and Bank of England members throughout the week.
Continued optimism of easing tensions in the Middle East saw the USD weaken off further last week. Sterling-Dollar at one point hit a 10-week high above 1.36 before the USD regained strength during yesterday’s bank holiday.
Oil and energy price concerns remain a key focus for FX markets, which yesterday’s attack on a key port in the UAE demonstrated. This saw a further spike in the price of oil, which had cooled slightly after positive ceasefire negotiations the previous week. The Dollar has regained in the region of 1% against GBP since last week’s lows. The Dollar’s status as a safe haven asset continues to ebb and flow on news related to Iran.
In terms of data, the biggest US event was Wednesday evening’s Federal Reserve meeting. This was expected to be Jerome Powell’s final meeting at the Fed, but that may not be the case. Powell will soon be stepping down as Chair, but officially his term as a Governor does not expire until 2028. He made it clear he will remain in position until the Trump administration probe into him is “well and truly over”. Powell also wished his successor, Kevin Warsh, well in his new role.
From a policy perspective, the outgoing Fed Chair’s press conference confirmed the wait and see approach as a result of the Iran war’s economic uncertainty. As with elsewhere this has led to higher energy, fuel and food prices in the US, driving up inflation.
Whilst the Fed opted to keep rates on hold again, their statement narrative came with language that suggested future rate cuts to come. Four of the twelve voting members dissented, which was the highest number in 34 years.
Unsurprisingly, Trump mole Stephen Miran continued with his sixth consecutive dissent in voting for a 0.25% rate cut. The other three members simply opposed the “easing bias” language used in the official statement. They believed that with inflation on the rise and global uncertainty, it should not be insinuated that the next move will be a cut.
This rift led to markets almost entirely pricing out interest cuts for the rest of this year. Incoming Chair Stephen Miran has a divided committee on his hands when he takes the helm at the end of the month.
Other US data also pointed towards a slowdown in domestic growth. Manufacturing and services data indicated a slowing trajectory. This has led to markets pricing in an overall cooling trend in the next jobs figures, which are released throughout this week.
In better news, the partial Government shutdown in the US was ended last week after 76 days. Donald Trump signed a spending bill, which should end the chaos at US airports.
Sterling-Dollar moved in a near 2% range last week, as shown below:
The latest Bank of England meeting also took place last week, with an expectedly hawkish hold of interest rates on Threadneedle Street. The decision was an almost unanimous at 8-1 with just the Bank’s Chief Economist, Huw Pill, seeking a hike in rates.
Pill has been vocal since the March meeting in his sentiment that interest rates are already too low. His concerns remain that inflation and second-round inflationary effects from the war in the Middle East will have a longer-term impact on inflation, requiring rate hikes.
At their meeting, the Bank outlined a range of different scenarios of how they will look to tackle inflation with interest rates. The most extreme of which suggested as many as six interest rate hikes would be required to tame energy price shocks. UK energy prices are expected to rise when the price cap is revised at the beginning of July.
For now, the narrative from Andrew Bailey and the Bank of England, as well as the forecasts from financial markets, is for rate hikes in the UK this year. Markets are pricing in as many as three 0.25% hikes in the next 12 months. As a result, the next meeting (18th June) is considered “live” for such a move.
That said, some banks such as Goldman Sachs see rates remaining flat throughout 2026, whilst economists at HSBC maintain a longer-term view of rates falling amidst an economic slowdown.
Geopolitical factors remained a driver of GBP also, but other UK data was more influential. The PMI readings remained resilient, with manufacturing in expansion and above expectation at 52.0 for April. A retail sales growth of 0.7% in March was also considerably better than expected, however some of this was attributed to motorists stocking up on fuel in anticipation of higher prices to come.
Sterling enjoyed a strong week versus the USD and Euro on the prospect of higher UK interest rates. This saw GBP hit 10-week and 6-week highs against the two respectively.
In Europe, you guessed it, the European Central Bank voted to keep interest rates on hold also. There was plenty of debate amongst the panel, but they eventually concluded with a unanimous decision. According to Christine Lagarde, there was an “extensive hike discussion which was debated at length and in depth”.
The hawkish hold from Frankfurt was also very much a wait and see approach for the June meeting, in which we can expect a good chance of a rate hike if energy prices do not ease in the interim. Risks to the economy from the Iran war were determined as having “intensified” by the panel.
Headline inflation in Europe was also published, hitting 3.0% in April. This was up further from the March figure, which itself was upwardly revised to 2.6%. Naturally this was almost entirely driven by energy and fuel increases, from events in the Middle East.
Economic sentiment figures also fell for the bloc in April. The reading hit 93.5 which was the lowest level since the pandemic as higher costs began to dent consumer confidence. This is bad news for a continent already struggling for economic growth. Stagflation fears remain due to the reliance on imported oil.
Movements on GBP-EUR can be seen in the chart below:
The week ahead:
Tuesday – ECB Lagarde speech (13:30), US JOLTS Job Openings (13:30)
Wednesday – EU/UK Services PMIs (08:15-09:30), ADP Non-Farm Employment Change (13:30)
Thursday – BoE Lombardelli speech (09:00), EU Retail Sales (10:00), US Unemployment Claims (13:30), BoE Taylor speech (13:40)
Friday – ECB Lagarde speech (08:00), BoE Bailey speech (13:20), US Non-Farm Payrolls & Unemployment (13:30)
After last week’s flurry of central bank meetings, this week attention moves more to employment data from the US. That said there is one interest rate meeting at the Reserve Bank of Australia, who voted to raise interest rates by 0.25% in the early hours of this morning. The RBA have been battling persistent inflation in Australia for some time now, and the Iran conflict has caused them to take policy action.
Any slowdown in the US employment market data this week will undoubtedly be of concern to the Federal Reserve. But with their dual mandate of maximum employment and 2% inflation to consider, the committee will have a tough call to make in their next meeting on 17th June. As mentioned, this should see new Chair Kevin Warsh take the helm.
On the jobs data, unemployment is forecast to remain stable at 4.3%. However the Non-Farm Payrolls figure is expected to show a drop to around 64,000 jobs added in April, down from the upside surprise of 178,000 for March.
On the UK side, there are a number of speeches from Bank of England policymakers throughout the week. These should contain some of the individual thoughts of the committee when we hear from Claire Lombardelli, Alan Taylor and Andrew Bailey. For UK data, we are just limited to the latest PMI data release for the Services sector on Wednesday morning.
It is a quieter week in Europe, with Retail Sales data combined with a few speeches from Christine Lagarde. Additional information on last week’s ECB meeting may see market projections on interest rates lean one way or the other.
As always, geopolitics remain a major force behind FX markets at the minute. Any cooling/escalation on Iran will continue to cause volatility this week, as well as fluctuations in oil prices.
With markets as unpredictable as ever, do make sure to get in touch with the Dealing Team for any pending requirements. These can be both to protect you against adverse movement or take advantage of an uptick in rates.
Have a great week.
