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• Expectations of a June cut by the SNB have been gaining traction
• But inflation picture isn't entirely favourable; weak franc doesn’t help
• A lot of uncertainty awaits the SNB’s decision due Thursday at 07:30 GMT

Will the SNB cut rates again?

The Swiss National Bank (SNB) got the ball rolling with interest rate cuts back in March, becoming the first major central bank to start its easing cycle. Inflation in Switzerland only peaked at 3.5% y/y and has been within the Bank’s 0-2% target for the past year. Investors might therefore be right to think that further easing is on the cards at the June meeting.

However, inflation may not be quite as subdued as the headline CPI figures suggest. Services inflation remains on an uptrend, reaching 2.2% y/y in May - the highest since 2001. But even headline CPI has started to creep up again, rising to 1.4% y/y in April and holding steady in May.  Moreover, the Swiss franc has been on the slide this year, adding to price pressures via higher import costs.

SNB President Thomas Jordan, who is due to step down from his post in September, recently said he sees small upside risks to inflation, with the weaker Swiss franc being the likely source. Those comments at the end of May caught investors off guard, triggering a sizeable reversal in the franc against both the US dollar and the euro (although possible SNB intervention in the foreign exchange market may also have been a factor for the rebound).

Are expectations of a cut justified?

Yet, most investors have been ratcheting up their bets of a follow-up 25-basis-point cut in June since Jordan’s remarks and market pricing currently points to around a 68% probability of such an action. Quite possibly, the rally in the franc is seen as lessening the upside risks to inflation and that’s why rate cut expectations have been moving in tandem with franc appreciation.

However, the Swiss currency is still more than 5% down against the dollar in the year-to-date and more than 2% lower versus the euro. When also considering the acceleration in services inflation and the stronger-than-expected GDP growth in the first quarter, there is little urgency for SNB policymakers to cut again so soon.

Swissie could be in for a bumpy ride

All this has set the stage for some heightened volatility on Thursday as a ‘surprise’ decision to stand pat would wrong foot many investors, while a rate cut would also come as unexpected to some traders. For the franc, the June decision will likely be critical for its near-term outlook as the chances of further gains depend on it.

Dollar/franc is in danger of breaching the key support barrier of the 200-day moving average (MA) in the 0.8890 area. If the SNB disappoints the dovish expectations and keeps rates unchanged at 1.50%, this could drag the pair down to the 50% Fibonacci retracement of the late December-early May uptrend at 0.8777 before testing the 61.8% Fibo of 0.8672.

But if the Bank does deliver a cut and hints at more to follow, dollar/franc could rebound towards the June peak of 0.8993 before aiming for the 50-day MA at 0.9061.

All in all, the SNB’s decision of whether to ease policy again in June is likely to be much more of a close call than the market pricing suggests and there will be a surprise element whatever the outcome.

• Soft UK data increase chances for September rate cut
• But wage growth remains elevated
• BoE meets on Thursday at 11:00 GMT
• But looming election could be a reason for cautiousness

Investors more convinced about a September cut

At its latest gathering, the Bank of England (BoE) appeared dovish enough to encourage market participants to assign a decent chance for a first quarter-point rate cut in June, but that didn’t last for long as the hotter-than-expected inflation data for April, and especially the stickiness in underlying price pressures, prompted investors to take their summer rate cut bets off the table.

That said, from pricing in around 30bps worth of reductions by December after the inflation numbers, investors are now expecting around 45, with the probability of a September move rising to around 80% after the April jobs report pointed to further cooling in the labor market and after GDP data for the same month revealed stagnation.

What makes the picture even more complicated is the fact that wage growth remained elevated, with average weekly earnings excluding bonuses rising at a 6% y/y rate. The inflation numbers for May are scheduled to be released on Wednesday, and with the services PMI for the month suggesting that charges rose at the slowest rate in over three years, the risks to the CPI numbers may be tilted to the downside.

Keeping cards close to chest

With all that in mind and as investors try to figure out when and by how much UK interest rates will fall, attention this week is likely to fall on the BoE policy decision on Thursday. No action is expected and thus, given that no updated projections are published this time, nor will a press conference be held, the spotlight is likely to fall on the accompanying statement and the meeting minutes.

However, with the UK general election scheduled just two weeks after the decision, policymakers are unlikely to upset the apple cart. They may prefer to wait and evaluate how the outcome may impact fiscal policy and thereby their own decisions. The Labor party, which is predicted to win the election on July 4, has pledged to keep spending tight. This could make the BoE’s work easier, allowing policymakers to cut interest rates earlier and faster.

Currently, the probability for an August reduction rests at 42% and a potential Labor victory could take it higher. However, until the August meeting, investors will have to digest several data releases as well, including the CPI figures for June.

Pound/dollar remains range bound

From a technical standpoint, pound/dollar has been trading in a sideways manner lately, with most of the price action contained between the 1.2500 level and the resistance barrier of 1.2800.

Last week, the pair was sold off after it hit resistance slightly above the upper end of the aforementioned range, and if the BoE provides the slightest hint that interest rates may start to decrease soon, the slide may continue perhaps until the bears challenge the lower bound of the range at 1.2500. For the picture to brighten, the price may need to climb and close decently above 1.2800.

Retail sales rose 0.1% for the month of May. Additionally, April's figure was revised downward to -0.2% month/month (previously flat). The reading was lower than the consensus forecast calling for an increase of 0.3%.

Trade in the auto sector was up 0.8% m/m, reflecting increases both at motor vehicle dealers (0.8%), and automotive parts and accessory stores (1.2%).

Sales at gasoline stations fell a sizeable -2.2% m/m, reversing last month's 1.9% m/m gain. This largely reflected a pullback in gas prices. The building materials and equipment category fell by a smaller -0.8% m/m.

Sales in the retail sales "control group", which excludes the volatile components above (autos, building materials and gas) and is used to estimate personal consumption expenditures (PCE), rose 0.4% on the month after declining by -0.5% m/m in April (revised from -0.3% previously).

• Among the control group, the largest positive contributions came from sporting goods stores (2.8% m/m), clothing and accessory stores (0.9% m/m) and non-store retailers (0.8% m/m).
• The largest declines were at home furnishings and electronics stores (-0.4% m/m) and food and beverage stores (-0.2% m/m).

Food services & drinking places – the only services category in the retail sales report –fell by -0.4% m/m.

Key Implications

After a breather in April, consumers were back at it in May. While not large, retail spending growth edged back into positive territory. With other evidence (slowing hire rate, uptick in unemployment rate etc.) pointing to the labor market cooling however, any deceleration there is likely to see retail spending follow suit. With two months of data in for the quarter, retail spending is currently tracking 1.6% q/q (annualized) for Q2 -  an uptick from a -0.8% (annualized) decline last quarter.

On the inflation front, while there is good news stemming from lower inflation readings in May, today's report is unlikely to do much to move the Fed's thinking with respect to the first rate cut. Retail spending was only modestly positive, and the number was below expectations. Of more interest to the Fed, is the fact that the improvement in inflation over the last two months was partially offset by a resurgence in payrolls in May combined with an acceleration in wage growth (average hourly earnings). We expect the Fed will continue awaiting a consistent flow of data in support of lower inflation, with a rate cut unlikely before December.

Markets

European markets for the second consecutive day enjoyed an interludium of calm after last week’s turbulence. There was little ‘new news’ from the political scene in France. Jordan Bardella of the far right Rassemblement National (RN) in an interview said his party needs an absolute majority in order to realize its program. At the same time, he indicated that his first move as prime ministers would be to execute an audit of public finances to determine its room for policy. It’s doubtful whether this will be enough remove markets’ uncertainty on the country’s fiscal path going forward. Still, intra-EMU spreads of France (and other countries) versus German Bunds narrowed slightly (France -3 bps, Italy -5 bps, Greece -5 bps, Portugal and Spain -3 bps). With safe haven demand fading (at least temporarily) German yields tentatively rose a few bps this morning (up 3.5bps). German ZEW confidence disappointed (cf infra) but initially had little impact on EMU yields. However, any tentative rise in yields on both sides of the Atlantic was blocked as US May retail sales for the second month in row surprised to the downside. Headline May sales grew only 0.1% M/M (vs a downwardly revised -0.2% M/M in April). Control sales (which is seen as a pointer for overall consumption in the GDP release) rebounded a slightly softer than expected 0.5%, but last month’s figure was also downwardly revised (-0.5%). Later in the session US May industrial production data printed much stronger than expected (0.9% VS 0.3% expected). Still, it only slightly mitigated the market reaction post the retail sales report.

After last week’s softer US price data, markets see today’s retail sales as further evidence that the supply-demand balance is moving better in line with what the Fed deems necessary to return inflation to the 2% target. US yields in a steepening move currently decline between 5 bps (2-y) and 1.5 bps (30-y). Markets are a moving ever closer to a scenario of the Fed delivering two 25 bps rate cuts this year (90%). For now US yields are holding above last week bottom levels. German yields after the US data swapped modest morning gains to change between +1.0 bp (2-y) and -1.5 bps (30-y). US equities are little moved by the sales data. The S&P 500 and Nasdaq open almost unchanged, with record levels still within striking distance. The Eurostoxx 50 rebounds 0.5%, but he technical picture remains fragile as the index struggles to sustainably regain the previous range bottom (4884 area). On FX markets, the dollar returned initial gains but basically trades little changed in a daily perspective (DXY 105.4, EUR/USD1.073). EUR/GBP hovers in a tight sideways range between 0.8445 and 0.8460 as investors are looking forward to the UK CPI/price data tomorrow, the BoE policy decision on Thursday and May retail sales scheduled for release on Friday.

News & Views

German ZEW investor expectation rose marginally in June from 47.1 to 47.5. While being the highest level since February 2022, consensus expected a bigger jump to 50. In contrast, the assessment of the economic situation in Germany has slightly deteriorated. The corresponding indicator fell from -72.3 to -73.8 (vs -65 expected). ZEW president Wambach added that inflation expectations of respondents increased which is likely related to the May increase inf inflation. The financial market experts’ sentiment concerning the economic development of the EMU increased from 47 to 51.3. The situation indicator for the eurozone remained unaltered at -38.6.

The National Bank of Hungary slowed the pace of interest rate cuts from 50 bps to 25 bps as they cut the policy rate from 7.25% to 7%. Lower inflation figures had to be balanced against a tougher risk climate which pushed the EUR/HUF cross rate dangerously close to 400. The statement and press conference of vice-governor Virag will follow later today including updated growth and inflation figures. Last month, Virag suggested little scope for more rate cuts after this June move. The forint profits in a first move with EUR/HUF returning below 395.

Graphs

DXY trade-weighted index: dollar keeps recent gains even as soft retail sales fuel Fed rate cut bets.

EUR/HUF: forint rebounds as MNB slows pace of rate cuts from 50 bps steps to 25 bps.

US 10-y yield nearing 4.20% support area as retail sales suggest consumer demand might be cooling.

Brent oil reversing post-OPEC+ decline even as uncertainty on demand persists.

Daily Pivots: (S1) 0.9520; (P) 0.9544; (R1) 0.9572; More....

EUR/CHF's fall from 0.9928 resumed after brief recovery and intraday bias is back on the downside. Sustained trading below below 61.8% retracement of 0.9252 to 0.9928 at 0.9510 will raise the chance of long term down trend resumption, and target 0.9252 low next. On the upside, above 0.9566 minor resistance will turn intraday bias neutral again first.

In the bigger picture, the break of 0.9563 support, as well as 55 W EMA (now at 0.9672) argues that rebound from 0.9252 has completed at 0.9928. Medium term bearish is maintained with both 1.0095 resistance intact. Firm break of 0.9252 will resume the down trend from 1.2004 (2018 high).

Daily Pivots: (S1) 1.0701; (P) 1.0719; (R1) 1.0753; More....

Intraday bias in EUR/USD remains neutral and some more consolidations could be seen above 1.0667. Further fall is expected as long as 55 4H EMA (now at 1.0765) holds. Fall from 1.0915 is seen as another leg in the larger corrective pattern. Below 1.0677 will target 1.0601 low first. Firm break there will target channel support at 1.0510 next.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern that's still in progress. Break of 1.0601 will target 1.0447 support and possibly further to 100% projection of 1.1274 to 1.0447 from 1.1138 at 1.0311. For now, this will remain the favored case as long as 1.0915 resistance holds, in case of rebound.

Daily Pivots: (S1) 1.2673; (P) 1.2691; (R1) 1.2724; More...

Intraday bias in GBP/USD remains neutral for the moment and some more consolidations would be seen. But risk will stay on the downside as long as 1.2859 resistance holds. Firm break of 1.2633 resistance turned support will argue that whole rise from 1.2298 has completed, and target 1.2445 and below.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern. Fall from 1.2892 is seen as the third leg which might have completed already. Break of 1.2892 resistance will argue that larger up trend from 1.0351(2022 low) is ready to resume through 1.3141. Meanwhile, break of 1.2445 support will extend the corrective pattern with another decline instead.

Daily Pivots: (S1) 157.27; (P) 157.62; (R1) 158.07; More...

Intraday bias in USD/JPY remains neutral at this point. Further rally would be in favor as long as 154.53 support holds. Break of 158.25 will resume the choppy rise from 151.86 towards 160.20 high. But upside should be limited there, at least on first attempt.

In the bigger picture, price actions from 160.20 medium term top are seen as a corrective pattern to rise from 150.25 only. Another rally is still expected at a later stage through 160.02 to resume the larger up trend. However, decisive break of 150.87 will argue that larger correction is possibly underway, and target 146.47 support next.

Swiss Franc breaks higher in early US session as benchmark treasury yields in both the US and Europe plummeted. This rise was partly triggered by US retail sales data coming in much weaker than anticipated. Additionally, investor sentiment in Europe remains fragile due to ongoing political risks in France.

On the geopolitical front, Russian President Vladimir Putin pledged to deepen trade and security ties with North Korea and support it against the US. This visit marks Putin's first to North Korea in 24 years. Simultaneously, Beijing has initiated an anti-dumping investigation targeting certain pork products from the European Union, following Brussels' recent move to raise tariffs on Chinese vehicles.

Australian Dollar is also performing strongly today, following RBA's decision to keep interest rates unchanged and leave door open for future rate hikes. Governor Michele Bullock indicated that the board did not discuss rate cuts today but did consider the rising risks of inflation. The consumer price inflation data for the June quarter will be critical, as it will provide a comprehensive view of inflationary pressures and guide the next monetary policy decisions.

In contrast, New Zealand Dollar is the weakest performer, further pressured by selloff against Australian Dollar. British Pound is the second weakest, followed by Canadian Dollar. Dollar, Euro, and Japanese Yen are trading in the middle of the pack.

Technically, CHF/JPY is continuing its record run. Near term outlook will stay bullish as long as 175.45 support holds. Next target is 61.8% projection of 137.40 to 170.53 from 162.12 at 182.59.

In Europe, at the time of writing, FTSE is up 0.52%. DAX is up 0.27%. CAC is up 0.61%. UK 10-year yield is down -0.038 at 4.082. Germany 10-year yield is down -0.006 at 2.409. Earlier in Asia, Nikkei rose 1.00%. Hong Kong HSI fell -0.11%. China Shanghai SSE rose 0.48%. Singapore Strait Times rose 0.13%. Japan 10-year JGB yield rose 0.0158 at 0.947.

US retail sales rise 0.1% mom in May, ex-auto sales down -0.1% mom.

US retail sales rose 0.1% mom to USD 703.1B in May, below expectation of 0.3% mom. Ex-auto sales fell -0.1% mom to 569.0B, worse than expectation of 0.2% mom growth. Ex-gasoline sales rose 0.3% mom to USD 649.5B. Ex-auto and gasoline sales rose 0.1% mom to USD 515.5B.

Total sales for the March through May period were up 2.9% from the same period a year ago.

ECB's de Guindos emphasizes importance of economic projections in rate decisions

ECB Vice President Luis de Guindos highlighted the critical role of updated macroeconomic projections in shaping interest rate decisions. During an interview with Spanish state broadcaster TVE, Guindos noted, "The projections are updated every three months, so we'll soon have new ones in September"

"Those are the most significant and interesting moments from the point of view of monetary policy, because our projections are a very important indicator when it comes to deciding the evolution of interest rates," he added.

Separately, according to the latest Reuters poll conducted from June 12-18, a substantial majority of economists (nearly 80%, or 64 out of 81) anticipate that ECB will implement two more rate cuts this year, specifically in September and December. This would lower the deposit rate to 3.25%.

Additionally, almost 90% of those surveyed (36 out of 41) believe the risks are tilted towards ECB making fewer cuts than more.

German ZEW ticks up to 47.5, sentiment and situation stagnate

German ZEW Economic Sentiment ticked up from 47.1 to 47.5 in June, below expectation of 50.0. Current Situation Index fell from -72.3 to -73.8, below expectation of -69.0.

Eurozone ZEW Economic Sentiment rose from 47.0 to 51.3, above expectation of 47.2. Current Situation Index was unchanged at -38.6.

ZEW President Professor Achim Wambach said: "Both the sentiment and the situation indicators stagnate. These developments must be interpreted in the context of a constant situation indicator for the eurozone as a whole. In contrast, the inflation expectations of the respondents increase, which is likely related to the inflation rate in May, which turned out higher than what was expected."

Eurozone CPI finalized at 2.6% in May, core at 2.9%

Eurozone CPI was finalized at 2.6% yoy in May, up from April's 2.4% yoy. CPI core (ex energy, food, alcohol & tobacco) was finalized at 2.9% yoy, up from prior month's 2.7% yoy. The highest contribution to the annual inflation rate came from services (+1.83 percentage points, pp), followed by food, alcohol & tobacco (+0.51 pp), non-energy industrial goods (+0.18 pp) and energy (+0.04 pp).

EU CPI was finalized at 2.7% yoy, up from April's 2.6% yoy. The lowest annual rates were registered in Latvia (0.0%), Finland (0.4%) and Italy (0.8%). The highest annual rates were recorded in Romania (5.8%), Belgium (4.9%) and Croatia (4.3%). Compared with April, annual inflation fell in eleven Member States, remained stable in two and rose in fourteen.

RBA stands pat, still not ruling anything in or out

RBA left its cash rate target unchanged at 4.35%, as widely anticipated. It maintained its stance of "not ruling anything in or out," indicating a cautious approach and open stance amid ongoing economic uncertainties.

While inflation is easing, RBA noted that it is doing so "more slowly than previously expected," and inflation "remains high." The central bank acknowledged that it will be "some time yet" before inflation is sustainably within the target range.

RBA added that recent economic data have been "mixed," reinforcing the need to remain "vigilant to upside risks to inflation." Consequently, the path of interest rates "remains uncertain".

BoJ's Ueda reiterates possibility of July rate hike

BoJ Governor Kazuo Ueda reiterated today that the central bank could raise interest rates again in July, stressing that this decision would be independent of the plan to taper bond purchases.

Speaking to parliament, Ueda clarified, "Our decision on bond-buying taper and interest rate hikes are two different things." He emphasized that a rate hike at the next policy meeting will depend on the economic, price, and financial data available at the time.

A recent Reuters poll on Monday revealed that 31% of economists surveyed expect BoJ to raise interest rates at its next policy meeting on July 30-31. Another 41% predict the next hike will occur in October, while slightly more than 20% anticipate a September increase. The remaining economists do not foresee a rate hike until 2025. This diversity of expectations underscores the uncertainty in forecasting BoJ's policy move.

USD/CHF Mid-Day Outlook

Daily Pivots: (S1) 0.8883; (P) 0.8908; (R1) 0.8921; More….

USD/CHF's fall from 0.9223 resumed by breaking through 0.8880 support today. The break of 38.2% retracement of 0.8332 to 0.9223 at 0.8883 argues that whole rise from 0.8332 might be completed after missing 0.9243. Intraday bias is back on the downside for 61.8% retracement at 0.8672 next. For now, risk will stay on the downside as long as 0.8992 resistance holds, in case of recovery.

In the bigger picture, price actions from 0.8332 medium term bottom are tentatively seen as developing into a corrective pattern to the down trend from 1.0146 (2022 high). Rejection by 0.9243 resistance affirms this case, and maintain medium term bearishness. While more range trading could be seen between 0.8332/0.9243 first, downside break out is mildly in favor at a later stage.

Economic Indicators Update

US retail sales rose 0.1% mom to USD 703.1B in May, below expectation of 0.3% mom. Ex-auto sales fell -0.1% mom to 569.0B, worse than expectation of 0.2% mom growth. Ex-gasoline sales rose 0.3% mom to USD 649.5B. Ex-auto and gasoline sales rose 0.1% mom to USD 515.5B.

Total sales for the March through May period were up 2.9% from the same period a year ago.

Full US retail sales release here.