It’s the cost of living and everyone pays

- The USD starts weaker following Fed speak

- ECB Lagarde still on the rate hike charge

- UK inflation major data print for UK this week

Recap

Markets very quiet and timid through most of Friday's trading session, until late in the day during Fed Chair Powell's speech at the Thomas Laubach Research Conference. The key line which saw GBPUSD and EURUSD jump off weekly lows was that ‘policy rates may not have to rise as far as otherwise due to tightening bank credit conditions’. Overall, USD still managed to finish the week higher ahead of key data over this week.

Comments from Janet Yellen on Friday may have also dampened Fed interest rate prospects after she told heads of the large banks that more mergers may be necessary.

Over the weekend ECB president Christine Lagarde doubled down on her hawkish rhetoric by suggesting that the ECB isn’t pausing based on the information they have today. The EUR has started the week stronger.

Today

Market rates

* Daily move - against G10 rates at 8:00am, 22.05.23

** Indicative rates - interbank rates at 8:00am, 22.05.23

Data points

Speeches

• EUR – ECB Vujcic, Guindos, Holzmann, Villeroy. and Lane

• USD – Bostic, Barkin, and Daly

Our thoughts

The UK will be back in focus this week with the release of April's inflation numbers. Current expectations see CPI to drop to 8.2% from 10.1%, and core CPI dropping to 6.1%. Should we see a number lower than this, then we will likely see scaling back of rate expectations by the BoE, which in turn will put GBP under pressure. Anything higher than what's expected and expect GBP to continue to push on higher.

May’s PMI numbers will be out on Tuesday for the UK, US, and EU to give a gauge of the strength of each economy, and we have German and US GDP numbers for the first quarter on Thursday. Minutes from the latest Fed meeting will be released Wednesday evening and the week ends with the Feds preferred measure of inflation, core PCE.

Little data out today aside from the Eurozone consumer confidence, and debt ceiling talks are set to continue with Janet Yellen suggesting that the government will fall short of funds by mid-June. USD has started the week weaker after Fed member Kashkari suggested that he may support holding interest rates in June.

Chart of the day

Inflation numbers are the key data point for the UK this week, with an expectation that headline inflation will drop from 10.1% to 8.3%, and core inflation expected to remain at 6.2%. A lot of this has been well documented recently by the Bank of England, but as ever should there a further downshift than expected then we could easily see markets ease June rate hike expectations, taking GBP lower with it.

Source: Bloomberg Finance L.P.

Have a great day.