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Forex: Economics Weekly
Economics Weekly: Economic Research and Analysis
The BoE interest rate decision, the Senate testimony by Fed Chairman Greenspan on the US economy, US foreign trade figures and the G7 meeting in London dominate the economic agenda this week.
The BoE is widely expected to keep interest rates on hold at 4.75% for a 10th consecutive month on Thursday. However, a decline in May for the manufacturing PMI to the lowest level since June 2003, and a 3-month low for the services PMI, also in May, reinforced the view in the interest rate futures market that UK base rates could be cut by the end of the year. In our view, this overstates the weakness and underestimates the resilience of the UK economy. Reports last week of the largest increase in mortgage approvals in nine months and a second rise in the Nationwide house price survey do in our view not justify calls on the BoE to insert new monetary stimulus to sustain economic growth. The most interesting part of the BoE meeting this week will be the minutes, due in two weeks time, where the content of the MPC, discussion will be unveiled. It will also then emerge whether Andrew Large, the solitary hawk last month, still backed the case for higher rates. This week’s key data releases include manufacturing output and global trade. The BRC retail sales monitor will be published on Tuesday. Also on Tuesday, the DMO sells £2.75bn gilts with a 2020 maturity and a coupon of 4.75%.
Speculation that the Federal Reserve could soon decide to refrain from tightening monetary policy after hiking fed funds uninterruptedly in the past 12 months moved up a notch last week after a disappointing employment report and dovish comments by Fed members Fischer and Gramlich. How much weight their comments carry in the light of future FOMC decisions may be clarified further this week, when Chairman Greenspan testifies to the Joint economic Committee on the US economy. Four months on from his ‘rate conundrum’ remarks, when 10yr yields were hovering around 4.15%, markets will be eager to hear what Greenspan thinks of the latest leg down in 10yr treasury yields below 4.0%. US foreign trade figures and the G7 meeting in London, with China attending, will be the principal drivers for currency markets this week.
It will be a quieter week in the euro zone for economic releases, which will take a back seat to the political agenda. Officials in Paris, Berlin and the UK, who chairs the rotating EU presidency on July 1st, are likely to set up negotiations on how to resolve the current crisis over the EU constitution. The next big date is June 16-17 where EU heads of state will gather to discuss how to resolve the impasse and move forward after the resounding ‘No’ in France and the Netherlands to the EU constitution last week.
Trevor Williams, Chief Economist
Lloyds TSB Bank,
London EC3R 8BQ
0207 283 - 1000
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