Sell GBP on aggressive BoE pricing - Danske Bank

STOXX 600 up 0.6%

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BOJ keeps policy unchanged

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Wall St futures little changed

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SELL GBP ON AGGRESSIVE BOE PRICING - DANSKE BANK (1154 GMT)

It is widely expected that the Bank of England will hike the base rate by 25 bps to 4.75% next Thursday. But the picture after that gets murkier.

Danske Bank analysts say current market pricing of a peak rate of 5.75% is too aggressive. They expect it to peak at 5%.

"We expect a slight hawkish shift in communication given the latest releases showing increased persistence in inflation and a tight labour market. However, we do not expect it to live up to market expectations," they said in a recent note of next week's meeting.

They expect no rate cuts until 2024 from the BoE.

As well as the hot data reads, recent decisions from the Australian and Canadian central banks to hike rates against market expectations is further ramping up pressure on UK policymakers. A robust UK economy is also fanning the flames.

Danske Bank sees EUR/GBP moving higher in their base-case scenario of a 25-bp hike next week.

"On balance, we increasingly see relative rates as a positive for EUR/GBP from here, which is one of several reasons behind our fundamental predisposition of buying EUR/GBP dips.

BOFA REVISES STOXX TARGET, STILL SEES 18% DOWNSIDE (1059 GMT)

Bank of America has been one of the most bearish on European equities on the street and has pushed back its expectations for the trough in the STOXX 600, while revising up its downside target.

BofA now sees the pan-European benchmark index falling around 18% to 380 by early next year, up from a previous trough target of 365 in the fourth quarter of 2023. It was last at 466.

"We still think that the next leg lower in the market will be driven by a sharp loss in growth momentum in response to the intensifying drag from a weakening credit cycle in Europe and the US and a fade in US fiscal support," BofA analysts write in a note.

Yet, to reflect the ongoing macro strength, BofA has slightly pushed back its expected bottom in global and euro PMIs, with economists calling for a later start to the expected U.S. recession.

"We expect the projected loss of growth momentum to lead to widening risk premia ... as well as renewed EPS downgrades, reversing the upgrades seen over recent weeks," BofA writes.

BofA says its projections imply 14% renewed underperformance for European cyclicals versus defensives and 8% underperformance for value versus growth.

"Our preferred defensive overweights are food & beverages and pharma ... while our favourite cyclical underweights are banks and autos," BofA writes.

(Samuel Indyk)

SHOULD WE EXPECT USD STRENGTH UNTIL LANDING? (0929 GMT)

Warning of upcoming dollar weakness has proven a popular take in 2023, after the greenback's remarkable strength last year.

But now BofA FX strategists are forecasting that USD will also remain strong in the second half.

"We revise our general G10 FX forecasts and look for more broad USD upside in the near-term," they wrote in a note on Thursday.

The Federal Reserve left interest rates unchanged on Wednesday but signaled in new projections that borrowing costs may still need to rise by as much as half of a percentage point by the end of this year.

BofA FX strategists had been forecasting euro-dollar at 1.05 for H1 and 1.10 by year-end, but now extend their 1.05 forecast for the rest of the year.

"...we still have to see a landing of the economy that will bring inflation to a sustained path towards the target," they explain.

Even so they maintain a longer-term forecast of 1.15 by the end of 2024, because they also see the dollar overvalued compared with equilibrium estimates.

The euro was last flat on the day at $1.0944.

(Lucy Raitano)

STOXX SHAKES OFF POST-ECB BLUES (0808 GMT)

The STOXX 600 has shed Thursday's gloom and is up around 0.4% so far, led by gains in classic defensives such as Roche, AstraZeneca, Nestle and Novartis . Big Luxury is getting a nice boost, thanks in part to a bit more optimism about China, now that the PBOC has signaled it intends to prop up the economy by loosening credit conditions. LVMH and Richemont are among the top weighted gainers on the STOXX, up 0.8% and 1.3%, respectively.

The index dropped sharply after the European Central Bank raised interest rates on Thursday and indicated its work was not yet done.

Further afield, the FTSE 100 is among the strongest performing indices, up 0.5% on the back of gains in AstraZeneca, but also Shell, after a broker upgrade, and BP , which are up around 0.7%. Supermarket chain Tesco is one of the largest weighted losers, down 0.4% after a trading update, while building materials companies and homebuilders are also capping gains following a profit warning from Travis Perkins.

All in all, the STOXX is heading for a 1.3% gain this week, its largest weekly rise since mid-April.

Here's your opening snapshot:

(Amanda Cooper)

EUROPEAN FUTURES TICK HIGHER (0635 GMT)

It's a steady start for European futures after a busy week for central banks which has culminated in the Bank of Japan keeping its policy settings, including yield curve control, unchanged.

That followed a somewhat hawkish Federal Reserve and European Central Bank, but stocks have largely shrugged off the prospect of higher rates and still look set to end the week in the green.

Euro STOXX 50 futures are up 0.2%. Futures on the FTSE 100, DAX and CAC 40 are up 0.1%-0.3%.

Wall Street contracts are little changed, while MSCI's index of Asia-Pac shares ex-Japan is up 1% to a four-month high, boosted by hopes of additional stimulus from China and an on hold BoJ.

(Samuel Indyk)

THE UK CONSUMER IS FEELING THE HEAT (0601 GMT)

It's not just the heatwave. UK consumers are paying through their noses for fish and chips too, and Friday brings the next quarterly survey of their views on inflation and rates.

Back in March, consumers surveyed didn't seem so confident the Bank of England was doing its job bringing prices down, but ironically also expected average inflation to fall in the coming months.

More recent surveys show British businesses expect to raise both output prices and wages at a slower pace over the coming year than they did a month ago.

The debate is partly moot. As Britain contends with one of the highest inflation rates among major advanced economies, the BOE seems set to hike rates a lot more.

It meets next week, and is undoubtedly at the farthest end of the hawkishness spectrum compared to the other three major central banks that met this week.

Expectations now are not just for a rate rise next week but a good 100 basis points of tightening in the next 12 months that could push the policy rate to 6% early next year .

That has put sterling on a tear. Data this week showing the labour market is running hotter than all economists polled by Reuters spurred the heaviest sell-off in gilts since last autumn's "mini-budget" crisis, lifting two-year borrowing costs to their highest since July 2008.

Supermarket leader Tesco reports some quarterly trading numbers later in the day. The stock has soared 17% this year, but pared some gains as grocers across Europe cap some prices.

Asda, Britain's third largest supermarket group, has frozen the prices of over 500 products until the end of August, giving consumers some hope food inflation will abate in the coming months.

Key developments that could influence markets on Friday:

The BOE releases its inflation attitudes survey

EU Finance ministers meet in Brussels

Eurozone inflation data, U.S. June University of Michigan survey, Italy April trade balance, Eurozone Q1 labour costs.

St. Louis Federal Reserve Bank President Bullard speaks in Oslo, Norway

Earnings/updates: Tesco

(Vidya Ranganathan)