UK Inflation Cools, Fed Minutes Turn Hawkish.
Summary
UK inflation fell to 2.8% in April, down sharply from 3.3% in March, as the new Ofgem energy price cap took effect; core and services inflation also cooled markedly
The minutes of the Federal Reserve's April meeting revealed the Committee is considering dropping its easing bias, a signal that the next move in US rates could be upward
A June ECB rate hike, recently seen as likely, is now looking less certain as oil prices have stabilised and second-round inflation effects have so far failed to materialise
UK labour market data showed unemployment rising to 5.0% and real wage growth close to stalling, pointing to a softening economy
Currency markets enter the final week of May with central bank direction back at the centre of attention. After a fortnight in which UK political turmoil dominated the narrative, the focus has shifted to what the latest data means for the path of interest rates on both sides of the Atlantic. The picture is becoming more sharply defined: a Federal Reserve edging towards a firmer stance, a Bank of England facing a genuine dilemma as inflation cools but political risk lingers, and a European Central Bank whose next move is far less certain than it appeared only weeks ago. With the US observing Memorial Day today and the UK on a bank holiday, the week begins quietly, but Thursday delivers a cluster of significant US data.
Sterling has had a difficult month, and last week brought a mixed set of signals. UK inflation fell to 2.8% in April from 3.3%, a sharper drop than expected, driven by the new Ofgem energy price cap that took effect at the start of the month. Core inflation eased to 2.5% and services inflation to 3.2%, the latter its lowest since January 2022. In isolation, cooling inflation of this kind would build the case for the Bank of England to consider easing. The labour market data pointed the same way, with unemployment rising to 5.0%, vacancies at a five-year low and real wage growth close to stalling. Yet the Bank has signalled it expects inflation to climb again later in the year, and the unresolved political situation continues to attach a risk premium to UK assets. Sterling remains caught between softening data and persistent domestic uncertainty.
The dollar has drawn support from a Federal Reserve that is signalling a firmer stance. The minutes of the late-April FOMC meeting, released last week, showed officials actively discussing the removal of the easing bias from the policy statement, a change that would indicate the next move in rates is more likely to be an increase than a cut. The minutes depict a central bank weighing persistent, energy-driven inflation against clear signs of slowing growth, and they marked the final meeting record of Jerome Powell's chairmanship. Attention now turns to how Kevin Warsh approaches his first meeting as Chair on 16 and 17 June, and to whether the data over the coming fortnight hardens or softens the case for tighter policy.
The euro has traded in a relatively narrow range, with the European Central Bank's intentions the central question. Following its hold in April, a 25 basis point hike in June had been widely anticipated, with President Lagarde having signalled that the Bank was moving away from its baseline scenario. That expectation has since softened. With oil prices not having risen as far as feared and no broad inflation spillover yet evident, several Governing Council members appear to be reconsidering, and a June move is no longer the consensus it recently was. Eurozone growth slowed to 0.2% in the first quarter, and the combination of a stagnating economy and contained underlying inflation has weakened the argument for immediate tightening.
Events to Watch This Week:
Tuesday 26 May: US Consumer Confidence
Thursday 28 May: US second estimate of Q1 2026 GDP; US PCE price index
Thursday is the focal point of the week, with the second estimate of US Q1 GDP and the PCE price index, the Federal Reserve's preferred inflation gauge, both released on the same day. With markets already weighing the prospect of a less accommodative Fed, a firm PCE reading would reinforce that expectation and could lend further support to the dollar. Speak to the Orbis dealing team ahead of Thursday's releases to ensure your upcoming transfers are protected.
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