Modest gains for the pound

Sterling made some modest gains against the dollar and the euro last week, as the market pared back the scale of expected interest rate cuts from the Bank of England this year following firmer than expected UK inflation readings for April, and is trading at around $1.2750 and 85.1p respectively this morning. The single currency ended marginally lower against the dollar last week and is hovering around the $1.0850 area at the start of play today.

UK government bond yields backed up quite a bit last week with 2-year yields rising by around 20bps and 10-year yields increasing by almost 10bps. German and US yields ended slightly higher on the week, by around 5bps in the case of 10-year yields.

In equity markets, the S&P 500 in the US gained around 0.7% on Friday, albeit it still finished off Wednesday’s all-time high, while European stocks ended slightly lower on the day (and on the week as well).

While the ECB is almost certain to cut interest rates next month, most probably by 25bps, officials remain cautious about the pace of cuts beyond June. Bundesbank President Nagel noted on Friday that wage growth in the zone remains strong – “we have to keep our vigilance when it comes to that” – and indicated the September meeting as a likely date for a second rate cut.

The key economic data this week come on Friday, with the release of a flash CPI inflation reading for May in the Euro area and PCE inflation for April in the US. In relation to the former, the consensus expects the annual rate of headline inflation to have nudged up to 2.5% this month (from 2.4% in April) with the core inflation rate seen unchanged at 2.7%. In the case of US PCE inflation – the Fed’s target measure – the consensus expects headline and core inflation to have remained steady in April at 2.7% and 2.8% respectively.