Early Morning Call: crucial week for GBP ahead of inflation data, BoE decision

Europe's equity market overview

Europe's equity markets opened lower on Monday, following the path set by US and APAC indices.

In the US, equity markets will remain closed today as the country celebrates Juneteenth. The British pound will be the centre of attention this week, given its continued strength against other currencies. On Wednesday, consumer inflation is expected to slow to a new 14-month low. The market forecasts headline consumer price inflation (CPI) at 8.5% in May year-over-year (YoY), down from 8.7% in April. The core inflation rate, though, is anticipated to remain at 6.8%, a record high reached last month.

Then, the Bank of England (BoE) meets next on Thursday. A 25-basis-point hike is on the cards. Bloomberg suggests that the BoE will do a dovish hike, that is, to emphasise their drive to keep driving down inflation but at the same time keep consumers on side. It's suggested that if the BoE does go down a quarter point, it will then pause. [currencies:GBP/USD] posted its strongest weekly gains last week and trades at a 14-month high; the British pound trades at its highest since December 2015 against the yen and at a 10-month high against the EUR.

The Bank of England

Before the Bank of England decision on Thursday, other central bank announcements are due this week.

Starting on Tuesday in China, the People's Bank of China (PBoC) is widely expected to lower loan prime rates by 10 basis points, which would take the one-year lost policy release (LPR) down to 3.55% and the five-year LPR to 4.2%. Last week, the PBoC cut short- and medium-term rates by 10 basis points.

Also on Tuesday, Reserve Bank of Australia (RBA) minutes. In early June, Australia's central bank unexpectedly raised interest rates by a quarter-point, taking the cash rate to 4.1%. In the RBA statement, further tightening could still be required to tame inflation in the context of a tight labor market.

AstraZenaca

AstraZeneca wants to spin off its China business, according to information gathered by the Financial Times. The newspaper reported on Sunday that the British pharmaceutical group is drafting a plan to list its China operations as a separate unit, either in Hong Kong or Shanghai. The drugmaker refused to comment on what it calls "rumors or speculations around future strategy or M&A."

The idea behind this operation is that, while retaining control of a business that accounted for 13% of total sales last year, AstraZeneca would be protected from tensions between China and others.

Make UK, the body that represents British manufacturers, has raised its outlook for the industry. Make UK says strong demand in the aerospace sector, boosted by a resumption of travel and aircraft orders post-Covid, and in the electronics sector will mean a better 2023. The organisation now expects factory output to fall by only 0.3% this year. Three months ago, it saw a 3.3% contraction. It stuck to the 0.8% growth forecast for 2024. Difficulties in sourcing materials are fading, but for medium-sized businesses, supply-chain pressures are still an issue.

Commordities overview

On the commodity market, the number of oil and gas rigs in operation fell again last week, according to Baker Hughes. The total rig count fell by eight to 687. The number of oil-producing rigs alone fell by four to 552.

And conditions in the American Midwest are raising concerns among soft commodity traders. Wheat, corn, and soybeans all set multi-month highs on Friday. In May, the US Department of Agriculture predicted record corn and soybean harvests in 2023, sending prices to levels not seen since November 2021. At the end of last month, Chicago wheat hit a two-and-a-half-year low.

But traders are now looking at a very different picture. Temperatures are on the rise, and crops are already struggling with moisture deficits. US markets will be closed on Monday, so no trade until tomorrow for commodity traders, who surely are keeping a close eye on weather forecasts.