Markets will continue to process the Fed’s decision to pause or “skip” a rate hike at their June meeting last week. According to the CME Fed Watch tool, there is now a 74% chance of a 25bp rate rise at its next meeting in late July with a 26% possibility of no change. But markets then see a 22% chance of rates at 5 to 5.25% at its following meeting on 20 September.

The FOMC decision was seen as a “hawkish hold” due to the new dot plot from officials indicating two more rate hikes this year. But markets have a different opinion again from the FOMC. There is clearly a broad range of views on the committee and Chair Powell will be grilled about the Fed’s policy stance by politicians on Capitol Hill this week. Policymakers are now hugely data dependent and will look like erring on the side of defeating inflation by additional policy tightening until we see a material slowing in inflation near to target which probably also means a higher jobless rate. A more cautious view would see more dollar selling after three straight weeks of losses.

The RBA publishes the minutes of its June policy meeting on Tuesday. The aussie has been on a roll lately, as the bank pivots further to the hawkish side and Beijing steps up its efforts to stimulate the Chinese economy, which is the biggest market for Australian exporters. Further gains could be in store for the currency if the minutes reinforce bets for more rate hikes by the RBA and China sticks to its pledge to boost growth.

After some unwelcome inflation and wage data, markets now expect the Bank of England to take rates close to 6% over the coming months. That equates to almost six additional rate hikes and is very close to the highs we saw during the ‘mini budget’ crisis last year. The question for Thursday’s BoE meeting, where a 25bp hike is highly likely, is whether the bank pushes back against investor expectations. Forward-looking inflation measures point to price pressures dropping noticeably through the summer. The 14-month highs in cable are closing in on resistance at the 200-week simple moving average at 1.287.

The eurozone will get a first sense of how the month of June is shaping up in terms of economic activity, as the PMI data is released on Friday. Last month brought a pretty bleak report on the economy as the surveys indicated that services experienced slower growth and manufacturing a sharper contraction. The upside was around fading inflation expectations. So far, there’s little indication that activity has picked up from there. The euro will be hoping to hold onto its recent bullish advance as it nears strong long-term resistance around 1.1032.

Major risk events of the week

21 June 2023, Wednesday

–UK CPI: The market median for headline inflation is currently 8.5%, two-tenths lower than the April print of 8.7%. This is still over four times the BoE’s inflation target of 2% and should keep the pressure on the MPC to remain in hiking mode.  Services inflation is seen unchanged at 6.9%.

–Fed Chair Powell Testimony: Jerome Powell appears before the House Financial Services Panel in his first public outing since the FOMC meeting last week. A hawkish set of dot plot projections by officials was slightly offset by a more cautious Powell in his press conference who set out a data dependent, meeting-by-meeting approach. Which Powell will we get this time?

22 June 2023, Thursday

–SNB Meeting: Analysts expect a 25bp rate hike which would take rates to 1.75%. Inflation dipped to 2.2% in May but has remained above the 0-2% target range since February 2022. SNB President Jordan recently said he could not rule out tightening policy to tackle stubborn inflation.

-Bank of England Meeting: Money markets price in just over 25bps for this meeting with nearly 125bps in total for 2023. A quarter point hike would take the bank rate to a 15-year high at 4.75% and the thirteenth straight rate increase. Policymakers are battling unexpectedly sticky inflation and high wage growth. 

23 June 2023, Friday

-UK Retail Sales: Some weakness is expected to be seen in demand in the coming months as the consumer gets hit by rising interest rates and sticky inflation. The jobless rate unexpectedly fell in April but is expected to pick up through 2023.

-Eurozone PMIs: The manufacturing sector is expected to remain subdued and unchanged at 44.8, with German weakness especially dragging on sentiment. The much stronger services printed at 55.1 in May but is forecast to dip to 54.2 as growth momentum fades.