key EU summit

GBP – Brexit talks continue

Brexit continues to be the focus in UK financial markets but there is still little sign of a solution.  Cross-party Brexit talks between the Conservatives and Labour will continue this week. The House of Commons is unlikely to vote on the EU Withdrawal Agreement this week. It is unlikely that a Brexit deal will be agreed in time to avoid UK participation in the European Parliament elections.

On Thursday the Bank of England releases an updated Inflation Report along with new economic forecasts.  Governor Carney will also hold a press conference. It is almost certain that interest rates will be left unchanged.  Despite some media talk that some Committee members are becoming more hawkish, the vote is still expected to be unanimous. The Bank is likely to signal modest increases in Bank Rate over the forecast horizon. The labour market remains tight and wage inflation still seems to be on the rise.  That said, inflation is still below target for now and the Brexit ’fog of uncertainty’ has not lifted.

March public finances recorded a fall of £17 billion in the deficit for the full financial year. The CBI April industrial survey showed lower orders but a rebound in optimism.  The April PMI surveys will give an indication of the strength of the economy in the second quarter.

GBPEUR – 1.1592

GBPUSD – 1.2933


EUR – GDP to outperform

Business surveys for the Eurozone have suggested that economic growth has been tepid. However, official data, particularly for industrial production, and retail sales have been more buoyant.  This suggests that first-quarter GDP growth will be stronger than expected. Markets expect a rise of 0.4% which would be double the previous 0.2%. The underlying pace of growth is probably slower and so growth is expected to slow in the second quarter. 

Meanwhile, Eurozone inflation is forecast to have accelerated in April. Expectations are for an increase to 1.6% in the headline rate, with the core measure expected to be up 1.0%.  Both would be 0.2% higher than last month.  Last week the German IFO survey fell to 99.2 from 99.7 in April on weaker current conditions and lower expectations.  This doesn’t bode well for Eurozone manufacturing PMIs.

EURUSD – 1.1157

EURGBP – 0.8627


USD – Fed on hold

The Fed will likely be in wait-and-see mode for this meeting and for several more. Interest rates will be left unchanged on Wednesday and the majority of members expect them to be on hold for at least the rest of this year. Some of the ‘headwinds’ for the US economy that the FOMC highlighted at its last meeting have already begun to ease. However, inflation continues to run below target. We expect the Fed to be “patient” before making any further changes to US interest rates.

The first-quarter GDP growth of 3.2% is up from 2.2% in the final quarter of last year and stronger than forecasts. As both retail sales and investment orders finished the quarter strongly, the initial indications for the second quarter also look positive. Within this week’s data, the initial indications for the present quarter will get particular attention.

Friday’s labour market report is likely to show further solid employment growth in April.  We also expect a stable 3.8% unemployment rate and a pickup in wage growth to 3.3%.  Also of interest will be the ISM manufacturing and non-manufacturing indices for April.  Activity outside manufacturing is also likely to remain well supported.

GBPUSD – 1.2933

EURUSD – 1.1157


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*Interbank rates correct as at 7 am on the date of publishing