May 9th FX Insights: Interest Rates and Market Trends

The Bank of England appears set to hike interest rates for the twelfth consecutive meeting later this week as the central bank continues with its fastest pace of tightening in decades in an attempt to combat rampant inflation. Most analysts expect the MPC to deliver a 0.25% hike on Thursday, taking the benchmark rate up to 4.5%, with policymakers likely to vote 7-2, with both Silvana Tenreyro and Swati Dhingra continuing to prefer no increase. At the same time the BoE will release new forecasts, which are expected to show a slightly more upbeat outlook for GDP, with rate setters likely to drop their view that the UK economy will slip into a recession later this year. Some analysts believe that a hike this week will be the last in the cycle, however currently the consensus is for a final hike next month, pushing the terminal rate to 4.75%.

Across the pond, the main data release of the week will be Wednesday’s CPI report for April. Inflation remains a stubborn thorn in the Fed’s side and this week’s data is unlikely to offer much support, coming after the recent FOMC meeting where officials signaled an impending end to the tightening cycle. Markets expect to see that both headline and core CPI rose 0.4% month on month, corresponding to 5.0% and 5.5%, year on year respectively. However, the recent drop in oil prices may help push inflation lower in May, ahead of the June FOMC meeting.

The single currency is struggling to reach its recent highs after slipping on Friday after the above consensus US labor market report. 1.0940 remains key support in EURUSD, with tomorrow’s US CPI print likely to set the tone for the coming days.

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