The Old Lady Of Threadneedle Takes The Stage

• The BoE is widely expected to leave the policy rate at 5.25%. The focus will be on the voting split, Monetary Policy Report and Governor Andrew Bailey’s press conference.

• The BOJ is tilting more hawkish.

• China’s April trade data confirms a modest cyclical recovery in economic activity is underway.

Dive into our latest FX Quarterly report for our longer-term USD outlook. We also introduce our adjusted Purchasing Power Parity (PPP) model, discuss the dollar's reserve currency status, and talk about China's path to recovery and its impact on Emerging Markets.

USD is firmer against most major currencies, Treasury yields are 1 to 2bps higher across the curve, and crude oil prices are up on lower US stockpiles. The US weekly initial jobless claims report is the data highlight (1:30pm London). Initial claims are expected at 212k vs. 208k last week and consistent with a labor market moving toward better balance. San Francisco Fed President Mary Daly (voter) participates in a fireside chat (7:00pm London).

GBP is trading on the defensive ahead of the Bank of England (BOE) interest rate decision (12:00pm London). The BoE is widely expected to leave the policy rate at 5.25%. The focus instead will be on the voting split, updated macroeconomic projections in the Monetary Policy Report and BOE Governor Andrew Bailey’s press conference (12:30pm London).

Markets are positioned for a dovish BOE policy guidance. The swaps market has fully priced-in a first rate cut in August and a total of 75bps of easing by March 2025. Speculators have also accumulated the most net short GBP futures positions since January 2023.

The BOE’s Monetary Policy Committee (MPC) vote split to keep rates on hold is expected to shift from 8-1 to 7-2. Dave Ramsden will likely join Swati Dhingra in pressing for a rate cut. Last month, Ramsden emphasised he had “become more confident in the evidence that risks to persistence in domestic inflation pressures are receding” and that “the balance of domestic risks to the outlook for UK inflation is now tilted to the downside”.

A dovish surprise would be if the vote favouring holding rates steady swings from 8-1 to 6-3. Recent comments by BOE Governor Bailey suggests the bar for him to support an immediate rate cut is low. According to Bailey the UK’s April inflation print “will show quite a strong drop” owing to the reduction in the energy price cap from April.

Our base case is for the BOE to signal that the time for cutting the Bank Rate remains some way off, which would trigger a relief rally in GBP. Leading indicators point to a pick-up in UK economic activity and underlying inflation pressures (private sector regular pay growth and services CPI) are tracking higher than the BOE’s February projections.

Later today, the BOE releases its April Decision Maker Panel (DMP) inflation survey (2:00pm London) and BOE Chief Economist Huw Pill hosts a Q&A session (5:15pm London). 1-year expectations are expected to fall a tick to 3.1%. However, both short- and medium-term expectations remain above the 2% target, warranting caution on the part of the BOE.

USD/JPY is range-bound around 155.50 and down from its April 29 pre-intervention high of roughly 160.15. The BOJ is tilting more hawkish which is a headwind for USD/JPY. Governor Ueda warned again that a policy response might be needed if foreign exchange rates affect inflation trend. The BOJ April Summary of Opinions also highlights there were many voices flagging the upside risks to inflation from a weaker yen. One member pointed out “it is quite possible that the pace of monetary policy normalization will increase” if a weaker yen leads to higher underlying inflation.

Nevertheless, we doubt the BOJ will tighten more than is currently priced-in (30bps of hikes in 2024). First, underlying inflation in Japan is in a firm downtrend. Core CPI (ex-fresh food & energy) dropped to a 16-month low of 2.9% y/y in March. Second, the pick-up in wages growth remains contained. In March, cash earnings rose significantly less than expected to 0.6% y/y (consensus: 1.4%) down from 1.4% in February while the less volatile scheduled pay growth printed for a second consecutive month at 1.7% y/y. Third, negative real wages is an ongoing drag to consumer spending. Annual real cash earnings contracted 2.5% in March after falling by 1.8% in February.

China’s April trade data confirms a modest cyclical recovery in economic activity is underway. Exports came in at 1.5% y/y vs. 1.3% expected and -7.5% in March, while imports came in at 8.4% y/y vs. 4.7% expected and -1.9% in March.

The Bank of Canada publishes its annual Financial System Review (FSR) (3:00pm London) followed by Governor Tiff Macklem’s press conference (4:00pm London). Last year’s FSR pointed out that indicators of financial stress among households remain low but are rising. We suspect the upcoming FSR will highlight increasing pockets of strains amongst households considering that interest rates are higher versus a year ago. If so, it would reinforce the case for a BOC rate cut in June which is currently 70% priced-in.

National Bank of Poland (NBP) meets today and is expected to keep rates at 5.75%. The bank will likely reiterate that “the current level of the NBP interest rates is conducive to meeting the NBP inflation target in the medium term.” Indeed, following the April 4 meeting, Governor Glapinski said no MPC members are talking about rate cuts in 2024. The market is pricing in 25bps of rate cuts over the next 12 months as inflation is running just under the 2.5% target. However, ongoing tension between the government and the central bank governor complicates the policy rate path projection.