A Hawkish Fed, a Split Bank of England, and a Peace Deal That Changes the Picture.
Summary
The Federal Reserve held rates last week but delivered a hawkish surprise, with its updated projections pointing to a rate rise this year rather than the cut previously signalled, in Kevin Warsh's first meeting as Chair
The Bank of England also held, but a second policymaker joined the call for higher rates, leaving the vote at seven to two and the hawks gaining ground
A US-Iran peace agreement signed midweek has seen energy prices fall sharply and shipping resume through the Strait of Hormuz, easing the inflation pressure that has driven markets for months
Andy Burnham won the Makerfield by-election, clearing his path to challenge Keir Starmer for the Labour leadership as soon as this week
It was among the most eventful weeks of the year, and the implications are still settling. Two central banks turned more hawkish just as the geopolitical backdrop that justified their caution began to shift. The signing of a US-Iran peace agreement has pulled energy prices down hard and reopened the Strait of Hormuz, raising the prospect that the inflation surge of recent months may now fade. Yet the timing was such that neither the Federal Reserve nor the Bank of England could lean on it when they met, leaving both sounding firmer than the changing energy picture might otherwise suggest. Layered on top is a UK political crisis that escalated further on Thursday, when a by-election win handed a leadership challenger his route into Parliament.
The dollar firmed last week after a hawkish debut from Kevin Warsh. The Federal Reserve held rates as expected, but the accompanying projections removed the rate cut that had previously been pencilled in for this year, with the median policymaker now anticipating an increase instead. Warsh used his first meeting to reshape the Fed's communication, stripping the statement back to a fraction of its former length and declining to submit his own rate projection, a clear signal of his preference for less forward guidance. The hawkish framing pushed equities lower and yields higher. This week the focus turns to Thursday's release of the PCE price index, the Fed's preferred inflation gauge. The reading covers May, so it predates the peace deal and is likely to remain elevated, but it will still shape the debate over whether that penned-in hike actually materialises.
Sterling held broadly steady against a softer dollar, but the domestic risks are mounting. The Bank of England kept rates unchanged on Thursday, yet the vote told the more important story: a second member joined the chief economist in pushing for an immediate rise, doubling the hawkish minority in a single meeting. May inflation held steady and unemployment ticked lower, leaving the committee divided over how heavily the energy shock will feed through. The larger concern for the pound is political. Andy Burnham's decisive by-election victory has cleared his path to challenge Starmer, who has vowed to fight on and warned that a contest would throw the country into chaos. Investors fear a change of leadership could mean looser fiscal discipline, and gilt yields rose on Friday after figures showed government borrowing reaching its highest May level since 2019. With a leadership challenge possible within days, sterling faces a period of heightened political risk.
The euro drew support last week from the European Central Bank's recent shift to tightening, though the peace agreement complicates the path ahead. Having raised rates for the first time since 2023 earlier in the month, the ECB now faces the same question confronting its peers: whether an easing of energy prices removes the justification for further hikes. Tuesday's flash purchasing managers' surveys for the eurozone will offer the first read on how the bloc's economy is faring midway through the year, and on whether the manufacturing weakness that has dogged the region is stabilising. For now the single currency remains underpinned by the ECB's hawkish turn, but a sustained fall in energy costs would weaken the case for the additional tightening markets had begun to expect.
Events to Watch This Week:
Tuesday 23 June: Flash PMIs for the UK, eurozone and US (June)
Thursday 25 June: US PCE price index (May); final estimate of US Q1 2026 GDP
Thursday's PCE release is the standout event for currency markets, offering the Federal Reserve's preferred read on inflation just days after a hawkish policy meeting. The flash PMIs on Tuesday will also be watched closely for signs of how the major economies are holding up. Speak to the Orbis dealing team ahead of Thursday to ensure your upcoming transfers are protected.
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