Sterling slightly firmer

The main currency pairs are not a whole lot changed this morning. The euro has drifted a little lower against the dollar to trade at around $1.0860, while sterling is slightly firmer against both the dollar and the single currency at around $1.2720 and 85.4p respectively. It feels like tomorrow’s UK CPI inflation data, to the extent they impact market expectations for a Bank of England rate cut next month, will be an important driver of the near-term outlook for the pound (the market currently sees about a 55% chance the BoE will cut in June).

Government bond yields continued to nudge higher yesterday, with US, German and UK 10-year yields all now up around 12bps or so from last week’s post-US inflation lows. Meanwhile, equity markets finished very marginally in the black yesterday, albeit with the S&P 500 closing just shy of last Wednesday’s all-time high.

Bank of England member Broadbent says if inflation continues “to evolve in line with its forecasts – forecasts that suggest monetary policy will have to become less restrictive at some point – then it’s possible interest rates could be cut some time over the summer.”

Fed’s Mester says the April CPI report was encouraging but “it’s still too soon to tell what path inflation is on,” adding that she thinks it’s unlikely the Fed will cut interest rates three times this year (as it had indicated in its last set of projections in March).

It’s relatively quiet on the economic data front again today, though Euro area labour costs for the first quarter of this year will be of some interest given the ECB’s concerns about wage growth in the zone. There are a number of Fed members scheduled to speak today, as are ECB President Lagarde and Bank of Governor Bailey.