Both the Federal Reserve and the ECB struck hawkish surprises last week. However, the latter hiked rates while the former did not, and markets chose to believe facts, rather than rhetoric. The dollar sold-off sharply against every major currency in the world, with the expectation of the Japanese yen, hurt by the Bank of Japan’s insistence on pretending it is still 2020. The British pound was the week’s winner, soaring by more than 2% against the dollar and topping the week’s charts. So far this year, Latin American currencies remain the stars, with the Colombian and Mexican pesos and the Brazilian real all up by double digits against the US dollar. The UK will be in focus this week. As in the US last week, the Bank of England meeting on Thursday will be preceded by the release of the May inflation numbers. There is near unanimity that the MPC will hike rates by another 25bps on Thursday and signal that more hikes are likely on the way. Later in the week we get the flash PMIs of business activity worldwide. The week will be uncharacteristically quiet in the US, and the spotlight will be elsewhere, primarily on sterling.

GBP

The combination of persistent inflation, signs of a wage-price spiral and economic resilience is boosting both expectations for the Bank of England terminal rate and the pound. Sterling has been one of our core bets this year, and we are happy to see it at the top of the G10 tables so far – we think it still has more room to run. In addition to yet another record-high core inflation print, we expect the Bank of England to hike rates this week and sound a hawkish tone. The vote among policymakers has been split 7-2 in recent meetings, but we think there is a possibility that one or both of the doves could join the rest of the MPC in voting for an immediate hike. We believe UK rates are likely to top out above 6% and we maintain our bullish view of GBP.

EUR

Last week’s ECB announcement was undeniably hawkish, with the Governing Council hiking rates and pre-committing to another hike in July. The central bank largely looked past the recent downward surprise in inflation, and no doubt remains focused on the still significant gap between rates and core inflation. The bank noted that there had been some signs of a softening in Euro Area price growth, although there were modest upward revisions to the inflation forecasts through to the end of 2025. Another rate increase in July appears to be a done deal, and we see September as a live meeting as well, absent a serious downward surprise in inflation between now and then. Markets are starting to agree with us, and the common currency is rising towards the top of its recent trading range against the US dollar.

USD

The Federal Reserve went with a ‘hawkish pause’ last week, leaving rates unchanged for the first time in this hiking cycle but trying to communicate to markets that the next move is likely to be another hike via an aggressive ‘dot plot’. The latter implied that most FOMC members still expect two more hikes before the cycle is over. The inflation data the day before the meeting showed little relief for the Fed. The monthly print for the key core subsindex marked the sixth consecutive month where the number has come at or above 0.4%, consistent with an unwelcome stabilisation of inflation around the 5% level. While markets still don’t believe the Fed will hike two more times, it is worth noting all expectations for cuts have been pushed into 2024, as we expected.