Today, decisions from the Bank of England (BoE), Swiss National Bank (SNB), and Norges Bank will be announced. Wall Street was closed yesterday due to Liberation Day. In Europe, stock indices declined, with the DAX falling by 0.4%. The EURUSD exchange rate remained unchanged, ending the day at 1.0745. The Polish zloty continued its appreciation this week after a previous sharp decline caused by the results of the European Parliament elections and the tense political situation in France. Today, the Bank of England, Norges Bank, and Swiss National Bank will decide on interest rates. Additionally, we will receive a batch of May data from the Polish economy.
Greater volatility is expected today in currency pairs related to the Swiss franc, Norwegian krone, and British pound. Opinions on the SNB decision are divided. Both a rate cut and rate stabilization are realistic. Favorable (low) inflation data and the recent strong appreciation of the CHF may be factors supporting a rate cut in Switzerland. Investors will also be keen to hear from the press conference following the meeting about the bank’s stance on potential currency interventions. At the end of May, Thomas Jordan (President of SNB) delivered a speech stating that if inflation risks were to materialize, it would likely involve a weaker CHF. Jordan added that in such a case, the central bank could counteract by selling foreign currencies. Let us recall that the SNB was the first central bank among G10 countries to cut rates from 1.75% to 1.5%. However, the scope for further reduction in borrowing costs is limited. Switzerland has managed to avoid excessive inflation growth to some extent (current CPI is 1.4% year-on-year). The peak inflation rate reached 3.5% (August 2022), which is a very good result compared to other economic centers.
Yesterday, the market received inflation data from the UK, the last significant publication before today’s Bank of England interest rate decision. There was a significant decrease in the inflation rate. CPI stood at 2% year-on-year, and the core indicator was reduced from 3.9% to 3.5%. Service inflation decreased from 5.9% to 5.7%, while estimates indicated a drop towards 5.5%. The pound slightly strengthened, and the GBP/USD rate rose to 1.2740.
Following the data, the market valuation of the probability of a rate cut in the UK on Thursday, June 20, decreased even further. Despite the reduction of the CPI indicator to the central bank’s target level, service inflation remains a problem. The latest result is 0.4 percentage points higher than forecasted in the May monetary policy report. Rent growth remains quite strong, although consistent with previous months. These data confirm that the bank will not cut interest rates today. Additionally, the year-on-year change is distorted by base effects – this must be kept in mind.
A decisive factor for the central bank to sustainably achieve its target is the level of new inflationary pressures, i.e., how high the seasonally adjusted month-to-month rates of change are. Here, the pressure remains high. The latest data suggests, however, that inflationary pressure has stabilized at too high a level in recent months.
According to BoE forecasts, inflation will be boosted year-on-year again in the coming months, similar to other countries, which is an argument for maintaining rates at the current level for a longer period.
In the short term, the GBP/USD rate is consolidating between 1.2650 and 1.2800. The quotes are also close to the upper boundary of a medium-term triangle. An additional resistance limiting the increase is the horizontal level of 1.2850, which results from the peak established in the first half of March 2024. If these two barriers are overcome, the rate has a chance to rise to the level of 1.3100-1.3125.
As for Norway, Norges Bank will most likely maintain current monetary policy parameters and communicate that the start of the easing cycle is distant. The market currently does not expect the institution to take steps in this direction this year.
Łukasz Zembik, Oanda TMS Brokers
