Markets close to pricing in peaks for all three major economies

Last week completed the major central bank set in terms of latest interest rate decisions, with the Bank of England electing to hike the Bank rate by 25 basis points. 

After the latest round of central bank decisions, it appears that the US, Euroland and UK central banks are at, or very close to, the peak in interest rates for this cycle. Indeed, the markets price in the next move for US interest rates being a cut, albeit 2-3 quarters away. Also little chance of another hike from European Central Bank, but a better-than-even prospect of a hike from the Bank of England either in September or November, and another in Q1 ’24, taking interest rates to a peak of 5.75%.   

However, what is clear is that the focus for each central bank is now on developments in economic activity and inflation over the course of the coming months. Should consumer price inflation continue to decline (headline and core), then the chances of further monetary tightening will recede further, in my view, but there will also be ongoing focus on developments in the labour market and underlying economic output. 

In terms of inflation, this week sees the US July consumer and producer price inflation figures released. Headline rates may tick up slightly, but core inflation rates are expected to hold at the same level in June or drop slightly. 

Meanwhile in the UK, the focus of attention is likely to be on the flash estimate of Q2 GDP (Gross Domestic Product), released on Friday. The market consensus for this outturn is for a flat reading, which given the effect of an extra bank holiday in May for the King’s Coronation and street parties, would not be a bad outturn. 

What will happen to the FX markets in the wake of these releases? GBP and EUR traded at the bottom of recent ranges against the USD last week and, in my view, those ranges are still likely to be tested to the downside this week, unless there is a major data surprise. For GBPUSD, the range appears to be $1.26-1.31. For EURUSD the range appears marginally tighter, around $1.0830-1.1270. If there were to be a break to the downside on either or both of these currencies against the USD, that could establish a new trading range lower, suggesting that the chances of a break back above $1.30 and $1.12 respectively are rapidly receding. Meanwhile, I’ll continue to keep a close eye on developments in Asian FX markets, where USDCNY has tested ¥7.20 again but there are signs of a potential peak in USDJPY. 

Reserve Bank of Australia holds rates last week; a raft of pauses this week?

As far as other central banks are concerned, last week saw the RBA (Reserve Bank of Australia) decide to leave interest rates on hold unexpectedly, but the peak in Aussie rates still looks as if it will be around 4.25/4.5%. There were no other surprises from the remainder of non-major central banks that made interest rate decisions.   

This week looks as if it will be similarly unremarkable, with the central banks of India, Mexico and Peru all expected to leave interest rates unchanged. However, with regard to Banxico (Mexican central bank) the interest has switched away from global pricing pressures and onto domestic pricing issues instead. If there is to be an easing of monetary policy in Mexico, then a lowering of wage cost pressures will likely be required. I suspect that Banxico won’t be reducing interest rates anytime soon, not unless there are clear cuts from the likes of the Federal Reserve first. 

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