Pound dips as investors look to inflation data and rates decision

British Pound

Reuters: The pound slipped to trade around a one-month low against the dollar on Tuesday as investors waited for inflation figures on Wednesday and the Bank of England's interest rate decision the day after that. Sterling was also down slightly against the euro, pulling away from a two-year high touched on Friday. The pound has been buffeted over the last week by swings in the euro and dollar as global currency markets have digested U.S. inflation data, a Federal Reserve meeting and French President Emmanuel Macron's decision to call snap elections.

The euro has tumbled and the dollar has strengthened against most currencies as the threat of a far right government in France has pushed investors towards the safety of the U.S. currency. Sterling was down 0.17% on Tuesday at $1.2683 as the dollar strengthened against most currencies, just above a one-month low of $1.2658 touched on Friday. Meanwhile, the euro was up very slightly against the pound at 84.52 pence, after sliding 0.6% last week to as low as 83.97 pence. The BoE's monetary policy committee is widely expected to leave interest rates at 5.25% on Thursday, though investors will scrutinise the accompanying statement for any hints about when borrowing costs might fall.

Consumer price index data due on Wednesday is expected to show Britain's inflation rate fell back to the BoE's 2% target in May, from 2.3% in April. "Wednesday's CPI, will impact market pricing of just under two cuts for this year, whilst Thursday is likely to see rates unchanged at 5.25%, with a 7–2 vote split likely from the MPC," said Joe Tuckey, head of FX analysis at broker Argentex. "In the absence of a cut this week, the MPC are likely to wait until the August meeting, by which time another inflation print will be known."

BoE policymakers' remain concerned that inflation for services, which dominate the UK economy, is running at an elevated 5.9% and could put upwards pressure on broader inflation again in the coming months. The UK's general election campaign ahead of polling day on July 4 has had little impact on the pound, with both parties pledging to be responsible on tax and spend after the Liz Truss budget crisis in 2022.

US Dollar

Reuters: The dollar was nursing losses on Wednesday after soft U.S. retail sales data reinforced bets of imminent Federal Reserve rate cuts, while sterling eased a touch ahead of a reading on UK inflation due later in the day. Figures released on Tuesday showed U.S. retail sales barely rose in May and data for the prior month was revised considerably lower, suggesting that economic activity remained lacklustre in the second quarter. That knocked the greenback lower in the immediate aftermath, though its losses were limited against a basket of currencies as the euro, which holds the largest weight in the dollar index, continues to be weighed down by political jitters in France and the wider bloc.

The euro was last marginally lower at $1.0738, while the dollar index steadied at 105.28. "We thought that the U.S. retail sales would be weak, and it was," said Joseph Capurso, head of international and sustainable economics at Commonwealth Bank of Australia. "Things are finally deteriorating. It looked like the U.S. consumer was never going to slow down, but looks like that's exactly what happened now." Markets are now pricing in a 67% chance the Fed will begin easing rates in September, according to the CME FedWatch tool, with roughly 48 basis points worth of cuts priced in for the rest of the year.

Sterling fell 0.03% to $1.2705 ahead of UK inflation data due later on Wednesday, which comes before a policy decision by the Bank of England on Thursday, where rates are expected to remain on hold. "Because of base effects from a year ago, because of falls in energy, electricity prices in the UK, the headline will come down a long way," said CBA's Capurso. "But what the BoE and the markets really care about is services inflation, and the BoE has said they really want that to come down further, and that is linked very heavily to wages and a tight labour market."

The Australian dollar was a notable outperformer against the greenback, also helped by a hawkish stance, from Reserve Bank of Australia Governor Michele Bullock on Tuesday in a press conference following the central bank's rate decision. The Aussie was last 0.08% higher at $0.6661, extending its 0.66% gain from the previous session. The New Zealand dollar meanwhile fell 0.08% to $0.6140. Elsewhere, the yen was little changed at 157.89 per dollar, as it continues to be pressured by stark interest rate differentials between Japan and the U.S., in particular.

Minutes of the Bank of Japan's April policy meeting out on Wednesday showed policymakers debated the impact a weak yen could have on prices, though the release did little to move the market as investors looked ahead to the next BOJ meeting in July. BOJ Governor Kazuo Ueda said on Tuesday the central bank could raise interest rates next month depending on economic data available at the time. "The bank's outlook for economic growth and price pressures suggests, in our view, that further policy normalization is on the horizon," Wells Fargo economists said of the BOJ in a note. "However, the fact that they have not made meaningful policy change since lifting the policy rate in March, and that they are taking a slow approach to the process of reducing bond purchases, suggests to us that forthcoming policy change will be rolled out in a gradual manner."

South African Rand

Reuters: South Africa's rand was slightly stronger in early trade on Tuesday, building on gains after unity government members were confirmed last week and ahead of talks by U.S. Federal Reserve officials later in the day. At 0641 GMT, the rand traded at 18.2350 against the dollar, about 0.15% stronger than its previous close. South Africa's National Assembly sat for the first time on Friday after last month's election. Cyril Ramaphosa of the African National Congress was re-elected as president.

Five political parties have signed up to join a government of national unity after the ANC lost its majority in the vote, including the pro-business Democratic Alliance which is favoured by markets. "The formation of a government of national unity is being liked by investors as the new government sets a platform for accelerated infrastructure and other reforms, to get the economy back on track after years of low growth and high unemployment," Rand Merchant Bank analysts said in a research note.

Traders will on Tuesday look for hints from Fed officials on the future interest rate path of the world's biggest economy. Like other emerging market economies, the risk-sensitive rand often takes cues from global factors. South Africa's benchmark 2030 government bond was stronger in early deals, with the yield down 3 basis points to 10.095%.

Global Markets

Reuters: Asian shares rose to their highest in three weeks on Wednesday, buoyed by a rally in tech stocks, while the dollar wobbled after soft U.S. retail sales data reinforced expectations of the Federal Reserve cutting rates later this year. MSCI's broadest index of Asia-Pacific shares outside Japan was 0.72% higher, with the tech stocks in the region up 1.6% at a record high. Japan's Nikkei rose 0.59%, while blue chip stocks in China were 0.42% lower. Hong Kong's Hang Seng index rose 1.3%. Data on Tuesday showed U.S. retail sales barely rose in May and data for the prior month was revised considerably lower, suggesting economic activity remained lacklustre in the second quarter.

The data led to a small boost in rate cut expectations for September with traders pricing in a 67% chance of easing compared to a 61% chance a day earlier, CME FedWatch tool showed. Markets are pricing in 48 basis points of cuts this year. "The Fed will need more data to support its case for a rate cut and investors should not overreact to one or two data points," said Vasu Menon, managing director of investment strategy at OCBC. Last week, mild U.S. inflation readings contrasted with an overall hawkish stance by Fed officials, who trimmed their previous median projection for three quarter-point rate cuts this year to one.

"Rate cuts are a stronger story for 2025 but that's fine because there is hope that it will happen in a bigger way over the next two years even if 2024 remains uncertain, and that will keep markets supported," Menon said. Fed officials, heartened by recent data, are looking for further confirmation that inflation is cooling and for any warning signs from a still-strong labour market as they steer cautiously toward what most expect to be an interest rate cut or two by the end of this year. The S&P 500 and Nasdaq closed at record highs on Tuesday, with Nvidia dethroning tech heavyweight Microsoft to become the world's most valuable company.

U.S. markets are closed on Wednesday, which will likely result in subdued trading throughout the day. In currency markets, the dollar index , which measures the U.S. unit against six rivals, was last at 105.29, while the euro steadied at $1.0738. The single currency has been under pressure in the wake of French President Emmanuel Macron calling for a snap election following a trouncing of his ruling centrist party in the European Parliament elections. Sterling was flat at $1.2704 in early trading ahead of UK inflation data due later in the day that will set the stage for Bank of England policy decision on Thursday, with the central bank widely expected to stand pat on rates.

The inflation report is expected to show Britain's inflation rate fell back to the BoE's 2% target in May, from 2.3% in April. Kyle Chapman, FX markets analyst at Ballinger Group, said Wednesday's May inflation report will be the deciding factor and a cut could still be on the table if services inflation gets back on track. "Unless it collapses, I think we will need a few pieces of evidence to convince the Bank of England that it is sustainably on the way down," he said.

In Asia, the Japanese yen was little changed at 157.83 per dollar, hovering close to the six-week low of 158.255 it touched last week. The currency remains under pressure from the wide difference between interest rates in Japan and the United States. Minutes of Bank of Japan's April policy meeting showed policymakers debated the impact a weak yen could have on prices, with some flagging the chance of raising interest rates sooner than expected if inflation overshoots. In commodities, oil prices wobbled as concerns over escalating conflicts between Russia and Ukraine and in the Middle East offset demand worries following an unexpected build in U.S. crude inventories.

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