Two Rate Decisions and a By-Election That Could Topple the PM.
Summary
The Federal Reserve announces on Wednesday in Kevin Warsh's first meeting as Chair, with rates widely expected to hold but the statement likely to drop its easing bias
The Bank of England follows on Thursday, with a hold also expected, though a cooling economy and an energy-driven inflation risk leave the decision finely balanced
The Makerfield by-election takes place on Thursday, and a win for Andy Burnham would clear his path to challenge Starmer for the Labour leadership, reviving the fiscal risk that unsettled sterling and gilts in May
The ECB raised rates last week for the first time since 2023, while US inflation climbed to its fastest pace in three years and the UK economy contracted in April
This is among the most consequential weeks of the year for currency markets. Two major central bank decisions land on consecutive days, and a parliamentary by-election with the potential to bring down the Prime Minister falls on the same day as the second of them. The backdrop was set last week by an ECB that delivered its first rate rise in three years, a US inflation report that came in hot, and a UK economy that began to buckle under the weight of the energy shock. Volatility across the major pairs is likely to be elevated from Wednesday afternoon onwards.
The dollar holds firm going into the Federal Reserve's decision on Wednesday, the first chaired by Kevin Warsh since he was sworn in last month. Markets see almost no chance of a change to rates, leaving the focus on two things: the updated projections and dot plot, and the tone Warsh strikes in his first press conference. Last week's CPI release showed headline inflation accelerating to its fastest annual pace in three years, driven overwhelmingly by energy, even as the core measure stayed comparatively contained. That split hands the new Chair a difficult balancing act. The widely held expectation is that the Fed formally abandons its easing bias and signals a prolonged hold. Warsh has indicated he favours a leaner, less heavily guided Fed, so any departure from the communication style of recent years will be watched as closely as the decision itself.
Sterling faces a rare double dose of event risk on Thursday. The Bank of England announces at midday, with the Monetary Policy Committee expected to keep Bank Rate unchanged. The April vote saw one member break ranks in favour of a hike, and with inflation projected to climb further in the second half of the year, the minutes and the vote split will be scrutinised for signs the hawks are gaining ground. Yet the growth picture is moving the other way. Data last week confirmed the economy contracted in April, the first monthly fall since August 2025, as the effects of the Iran conflict reached UK output. The pound actually firmed after that release, as markets pared back expectations of further tightening, but the more pressing risk arrives the same afternoon. The Makerfield by-election could return Andy Burnham to Parliament, and with it the prospect of a leadership challenge to Starmer. Should that scenario gather pace, the fiscal risk premium that drove gilt yields to multi-decade highs in May could return quickly.
The euro begins the week on the front foot after the ECB raised its key rates by a quarter point on Thursday, lifting the deposit facility rate to 2.25% in its first hike since 2023. The Governing Council was explicit that the move was a response to the inflationary pressure generated by the war in the Middle East, and it raised its inflation forecasts while trimming its growth outlook. President Lagarde was at pains to stress that this was not a one-off insurance move, and markets now expect at least one further increase later in the year. That hawkish framing should lend the euro support, though the single currency was little changed immediately after the decision, suggesting much of the move had already been anticipated.
Events to Watch This Week:
Wednesday 17 June: US Federal Reserve rate decision, updated projections and Warsh press conference
Thursday 18 June: Bank of England rate decision and minutes; Makerfield by-election
The Federal Reserve and Bank of England decisions on consecutive days, combined with a by-election that could reshape the UK political landscape, make this a week of considerable event risk across the major currencies. Speak to the Orbis dealing team ahead of Wednesday to ensure your upcoming transfers are protected.
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