Last week saw the Bank of England policymakers stick to the idea that rates should rise gradually. Over the medium term, the BoE assume a smooth Brexit with appetite to increase rates once the uncertainties subside. May GDP rebounded by 0.3%, almost reversing the 0.4% drop in April. The most significant aspect was upward revisions to previous months, which suggests there will still be growth in the second quarter. Meanwhile, the RICS housing survey showed a rebound in prices and new buyer enquiries.
We expect the unemployment rate to rise slightly in May from the four-decade low of 3.8%. Wage growth is forecast to increase marginally to 3.5% from 3.4%, though with bonuses included, growth may edge down slightly. Overall, the labour market remains tight and should continue to support personal income. We expect retail sales to fall in June despite this, with poor weather and ongoing Brexit uncertainty reducing spending. A slight rise in core inflation is likely, though headline inflation may not rise with a fall in fuel prices. Bank of England Governor Carney’s comments will be closely watched for further clues on the Bank’s thoughts as he speaks on a panel in Paris.
GBPEUR – 1.1155
GBPUSD – 1.2575
In contrast to the Bank of England who expect rates to rise, the European Central Bank are signalling more policy easing. The minutes of the June meeting suggest that the ECB are considering adjustments to its forward guidance and interest rates and more quantitative easing. A change in guidance at the July meeting could lead the way for a rate cut in September.
This week is quieter in the Eurozone. There is a chance that June inflation is revised higher following the upward revision to German figures last week. Even with a small increase to 1.3%, inflation remains too low relative to the ECB target. We are also likely to see a fall in the German ZEW survey, though the expectations index could rise following the plunge to -21.1 last month. Eurozone industrial production rebounded by 0.9% in May.
EURUSD – 1.1272
EURGBP – 0.8965
Despite the recent increases in employment figures and inflation, Federal Reserve Chair Powell did nothing to decrease market expectations for a rate cut in July. Powell continued to emphasise economic uncertainty and suggested that the relationship between economic slack and inflation has “gone away”. He suggested that the neutral interest rate and natural unemployment rate were lower than previously estimated. The markets now fully expect a 0.25% rate reduction on 31 July.
This week, we have an extended lineup of Fed speakers, including Powell, Williams, Evans and Bullard. These members may vote for a rate cut at the end of the month. A couple of the speakers may favour leaving policy unchanged – Bowman and Rosengren. Meanwhile, we have a busy week for data with US retail sales, industrial production and housing starts, along with a number of survey updates and the University of Michigan consumer sentiment report. The data is expected to show a positive economic outlook generally. Second quarter GDP growth is likely to slow from the pace in the first quarter (3.1%), but not by much – perhaps down to 2.6%.
GBPUSD – 1.2575
EURUSD – 1.1272
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*Interbank rates correct as at 7 am on the date of publishing
