Central Banks Steady Amid Inflation Concerns.

• Bank of England (BoE) Outlook: The BoE is expected to maintain its benchmark interest rate at 5.25% and is anticipated to start reducing rates in Q4 due to persistent high services inflation.
• UK Inflation Figures: The headline Consumer Price Index (CPI) rose by 2.0%, meeting the bank’s target for the first time since October 2021, with core CPI at 3.5%.
• Eurozone Political Concerns: EUR/USD weakens due to political uncertainty in the Eurozone, particularly following a call for a snap election in France, and the potential divergence in monetary policies between the Eurozone and the US.
• Swiss National Bank (SNB) Rate Cut: The SNB cut its Sight Deposit Rate by 25 basis points to 1.25%, aligning with market expectations, following a surprise rate reduction in March.
• US Economic Indicators: A weaker US Retail Sales report suggests subdued consumer activity, supporting the case for potential Fed rate cuts, though hawkish Fed officials may limit the Greenback’s downside. Upcoming economic data will further influence market expectations.

GBP: The Bank of England (BoE) is expected to maintain its benchmark interest rate at 5.25% following its policy meeting on Thursday. Alongside the interest rate decision, the BoE will release its Monetary Policy Minutes. Despite ongoing disinflationary pressures observed in May, the BoE is anticipated to start reducing its policy rate in Q4 due to persistent high services inflation (+5.7% YoY vs. +5.3% YoY expected in May). In the UK, the headline Consumer Price Index (CPI) increased by 2.0% (down from 2.3%), and the core CPI, excluding food and energy costs, rose by 3.5% (down from 3.9%). This marks the first time the CPI has met the bank’s target since October 2021. Money markets foresee around 45 bps of easing by the BoE by year-end and nearly 30 bps by November. The latest inflation figures are unlikely to alter the BoE’s plan to begin easing later this year. A cautious tone, especially highlighting services inflation and a tight domestic labour market, is expected. The BoE is predicted to hold its policy rate at 5.25% on Thursday at 11 GMT, with the vote likely remaining 7-2 and a few changes to the statement. Traders will focus on rate guidance for the August meeting. In its May policy decision, the BoE stressed the importance of forthcoming data for monetary policy decisions. Following the May 9 event, Governor Andrew Bailey suggested future rate cuts might need to exceed market expectations to prevent inflation from falling below target. On Thursday, Bailey noted that even a small rate cut would maintain restrictive monetary policy. Outgoing Deputy Governor Ben Broadbent indicated a potential summer rate cut, contingent on data alignment with projections, particularly focusing on short-term services CPI.

EUR: The EUR/USD pair weakens near 1.0730, breaking a three-day winning streak during the early European session on Thursday. However, gains for the pair seem limited due to investor concerns about political uncertainty in the Eurozone. Investors are closely watching the preliminary Eurozone and US Purchasing Managers Index (PMI) for June, due on Friday. The call for a snap election in France following a defeat by the far-right National Rally has raised fears of political instability in the Eurozone, weighing on the Euro (EUR). Additionally, the divergence in monetary policy between the Eurozone and the US could further pressure the shared currency. On Wednesday, ECB Governing Council member Mario Centeno stated that the central bank could ease monetary policy further if inflation continues to moderate. Separately, the Swiss National Bank (SNB) decided to cut the benchmark Sight Deposit Rate by 25 basis points (bps) from 1.50% to 1.25%, aligning with market expectations. This follows a surprise 25 bps rate reduction in March, making the SNB the first major central bank to dial back tighter monetary policy.

USD: In the US, a weaker Retail Sales report indicated subdued consumer activity, supporting the case for potential Federal Reserve (Fed) rate cuts later this year, which could weaken the Greenback in the near term. However, a hawkish stance from several Fed officials might limit the downside. Boston Fed President Susan Collins cautioned on Tuesday that it is still too early to determine if inflation is on track to meet the Fed’s 2% target. Richmond Fed President Thomas Barkin mentioned that more months of economic data are needed before considering a rate cut. Upcoming US economic data releases on Thursday include Initial Jobless Claims, Building Permits, Housing Starts, and the Philly Fed Manufacturing Index. Focus will shift to the Indian HSBC Manufacturing and Services PMI on Friday, alongside the US S&P Global PMI reports.