GBP awaits UK CPI release amid slump in housing market and possible change in rate hike expectation

The GBP is awaiting key UK-specific news this week, with April inflation data scheduled to be released on Wednesday. In the meantime, an update on the housing market showed a decline in the year-on-year increase in asking prices, but a significant month-on-month increase of 1.8%. Despite the Bank Rate being hiked in the past year, mortgage rates have eased, and the economic conditions have remained resilient, providing reasons for optimism about house prices. The upcoming CPI release is expected to show a sharp fall of almost 2% year-on-year, primarily driven by the drop in energy costs. If the headline CPI prints at the expected 8.2%, it would be below the Bank of England’s forecast and could support the case for a pause in rate hikes at the June meeting, contrary to current market expectations. Therefore, a potential adjustment in rate hike expectations based on weaker inflation data could put downward pressure on the pound.

Eurozone

In the eurozone, the euro faced renewed pressure last week due to rising US yields and economic data falling below expectations, challenging the narrative of economic “divergence” that previously supported the currency. Traders will focus on commentary from ECB members, although it may not be fully reflected in FX markets. Hawkish comments from policymakers have raised terminal rate expectations to 3.75%, aligning with the house view. Key speakers include Vice President Luis de Guindos, Robert Holzmann, and Bank of France Governor Francois Villeroy and Chief Economist Philip Lane.

US

In the US, front-end Treasury yields rose last week as several Fed members signaled towards higher rates. This benefited the dollar, leading to a 0.5% increase in the DXY index. However, this dynamic may reverse following remarks from Fed Chair Powell, who hinted at a pause in the hiking cycle at the June meeting. Powell emphasized the need to assess the data and evolving outlook carefully. Additionally, Minneapolis Fed President Neel Kashkari expressed support for holding interest rates at current levels at the June meeting. These comments have led to lower Treasury yields and weighed on the dollar. The ongoing bipartisan talks in Washington regarding the debt ceiling remain a priority, and any developments in these discussions could impact market sentiment. Traders will also keep an eye on FOMC commentary as the debate on whether to hold rates next month continues. Comments from Fed member Daly, although not a voting FOMC member until 2024, will be monitored.