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There is growing concerns in the UK housing sector; several prominent lenders have pulled cheaper deals (HSBC, for example, increased mortgage rates twice in a week). Homeowners are confronting the reality of higher mortgage payments in the months ahead as they switch from lower fixed-rate deals to higher rates, which could ultimately slow consumer spending in the economy. According to the FT, UK households that come to the end of fixed-rate mortgage deals next year face an average £2,900 increase in annual payments. Ultimately, this is likely to see the BoE continue to adopt a cautious stance.
Wages and Inflation are also concerning for the UK. Wage growth (excluding bonuses) accelerated in the February-April quarter, running around 7.2%: a very tight labour market. Regarding inflation, according to the Office for National Statistics (ONS), headline YoY inflation eased into single digits in April at 8.7%, down from 10.1% in March (this is still more than four times the BoE’s inflation target and was higher than economists’ estimates [8.3%]). While the slowdown in consumer prices is somewhat positive, core YoY inflation remains a concern.
Recent core inflation (removes volatile components such as food and energy) came in above economists’ estimates (6.2%) at 6.8% for April. Wednesday will see the latest UK inflation numbers. Expectations are for headline inflation (YoY) in May to slow to 8.5% (median estimate) with a forecast range between 8.8% and 8.0%. Nevertheless, core YoY inflation for May is anticipated to remain unchanged at 6.8% (forecast range falls in between 6.9% and 6.5%). This core measure will be a notable talking point, particularly if we see a substantial deviation.
In terms of market reaction, sterling is unlikely to respond much to a 25 basis-point hike, unless a deviation from the expectation is observed, of course. With that being said, a more noticeable reaction is likely to be seen from what is said/not said in the accompanying statement and what is printed in the BoE’s economic projections.
I have also added a technical view for the GBP/USD heading into the week. Notably, the currency pair printed its largest one-week advance this year last week and touched gloves with YTD tops. Gilts will also be widely watched this week. The short-dated 2-year Gilt yield rose 0.23 percentage points to its highest level since 2008 on Tuesday, touching a high of around 4.9% and eclipsing the mini-budget crisis in September last year as investors purchased bonds at higher rates.
Other economic events to be mindful of this week are the minutes out of the Reserve Bank of Australia (RBA) on Tuesday, as well as US housing data later in the session. In addition to UK inflation on Wednesday, we will also see Fed Chair Powell testify on Wednesday (and Thursday).
Thursday, alongside the BoE rate decision, markets will also welcome the Swiss National Bank (SNB) rate decision—expected to raise the Official Policy Rate by 50 basis points—US unemployment claims and existing home sales data. Finally on Friday, flash manufacturing and services PMIs across Europe, the UK and the US will be released.
As a reminder, US banks will be closed in observance of Juneteenth on Monday, which could see thin liquidity and potentially irregular volatility.
Technical View: Markets to Watch for the Week Ahead
Currencies
Lower Levels for the Dollar Index?
The US dollar—according to the US Dollar Index—fell -1.2% last week, recording its largest one-day slump since January this year. MTD, the buck is also down -1.9%.
We have an interesting clash of timeframes regarding trend direction for the US dollar. The monthly timeframe has been climbing since early 2008. The current correction that begun in Q4 of 2022 has dropped around -12% (thus far), a touch shy of the previous correction seen in 2017 of around -15%. Extending the current correction could land monthly price at support from 99.67, a level complemented by two Fibonacci ratios (38.2% and 61.8%) at 98.72 and 98.95, respectively.
Therefore, this is an area that may offer a floor to work with in the weeks to come, assuming further downside occurs. The daily timeframe, on the other hand, is trending southbound, both in the longer term (from the peak of 114.78) and in the short term from the peak of 104.70. With room to press lower on the monthly scale to support from 99.67 and the daily timeframe trending lower, additional underperformance is likely for the greenback.
Adding to the bearish vibe, price action on the daily timeframe elbowed south of the 50-day simple moving average on Thursday, currently fluctuating at 102.60 (a move highlighting daily demand from 100.27-100.77). In terms of the Relative Strength Index (RSI), the monthly chart shows the indicator nearing the 50.00 centreline, sharing space with an indicator trendline resistance-turned-support taken from the high of 79.96. From the daily timeframe, however, we are firmly south of the 50.00 centreline and closing in on oversold territory (negative momentum).
Overall, while a pullback is not out of the question on the daily scale this week (50-day SMA could deliver dynamic resistance), the technical pendulum is swinging in favour of further selling over the coming weeks.
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