In addition to the Bank of England, there will also be a focus on Scottish elections and Welsh parliament and English local elections. There are roughly even odds on the SNP winning a majority in the 129-seat Scottish parliament. As they favour another independence referendum, a majority win in these Scottish elections will be taken as a mandate for another vote. There are also some interesting by-election seats up for grabs.
The main focus this week will be on the Bank of England (BoE) policy decision on Thursday. The BoE is expected to be more optimistic around the economic outlook. We don’t expect any changes to monetary policy with the Bank Rate of 0.1% and asset purchases at £895bn. The BoE will publish an update to its quarterly economic forecasts. Since the report in February, developments have been entirely positive. Vaccinations and restrictions have continued along with the government’s target. Indicators and surveys have also increased confidence about the economic recovery.
As a result of the improved economic perforation and extension to the furlough scheme, the BoE is likely to upgrade its expectations for growth. Unemployment is likely to peak lower than previously expected and economic activity will more likely return to its pre-Covid level by the end of this year. We are likely to see further evidence of strength with the final PMI numbers this week.
GBPEUR – 1.1531
GBPUSD – 1.3879
In contrast to the UK and US, Eurozone first-quarter growth fell by 0.6%, signalling a return to recession. Containment measures for some countries have been extended. Though, France is set to start gradual lifting of restrictions today, as infection rates move lower. The latest surveys suggest confidence is rising as vaccinations increase. The economy is expected to continue opening with a return to growth in the second quarter.
The Norges central bank is expected to leave their policy settings unchanged for Norway, with the deposit rate remaining at 0.0%. There are expectations that the Norges Bank may start to raise rates in the second half of the year. In the Eurozone, the final PMI readings along with retail sales and German industrial production will give some idea of the strength of the pick up in the economy in the second quarter.
EURUSD – 1.2036
EURGBP – 0.8672
Economic data in the US continued to paint a positive picture. Despite this, the Federal Reserve again said it is in no hurry to tighten monetary policy or to taper bond purchases. The US economy expanded by 6.4% in the first quarter, with personal consumption increasing 10.7%. Despite this positivity, the US dollar remains little change, staying below 1.40 to the pound.
This week, we are likely to see more evidence of a strong economy, with the labour market report. Markets expect non-farm payrolls to post another increase above 900k, which follows the 916k gain in March. Weekly initial jobless claims are likely to fall to the lowest level since the start of Covid. We also expect to see rises in the ISM surveys for manufacturing and services.
Despite the positive data, it is worth noting that even with another significant increase in payrolls, employment will still be 7 million below pre-Covid levels. The unemployment rate, which is likely to fall to 5.7% in April, may well underestimate the real slack in the labour market. This is likely to contribute to the Fed retaining loose policy for some time.
GBPUSD – 1.3879
EURUSD – 1.2036
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*Interbank rates correct at 7 am on the date of publishing.
