On the political side, there are key votes on EU withdrawal bill as MPs meet on Tuesday and Wednesday. Theresa May plans to overturn amendments made by the House of Lords. There are two controversial amendments that give the most concern to the government. The first instructs the Prime Minister to negotiate a customs union with the EU. The second gives Parliament a more meaningful vote on the final Brexit deal. Overall, the government seeks to overturn the fifteen amendments that were introduced to the bill by the House of Lords. Their level of success could prove key to the direction of negotiations at next month’s EU Summit.
Last week provided further evidence that the economy would recover in the second quarter following a slowdown in the first quarter. Construction and services PMIs continued to show solid growth at 52.5 and 54.0 respectively. Additional evidence of the strength of the rebound was expected this week. Following declines in March, both manufacturing and construction output were weaker than expected this morning, pouring cold water on any expectations of a rate hike in August. We still have retail sales and the latest labour market figures which are expected to show another healthy rise in employment growth. Inflation is also likely to have ticked higher last month.
GBPEUR – 1.1369
GBPUSD – 1.3421
We have seen a slowdown in the recent data and continuing uncertainty around the political situation in Italy. Even against this backdrop, comments from ECB speakers suggest that they are still committed to ending their bond-buying program this year. The latest inflation figures for May showed the headline rate jump to 1.9%, though this was boosted by Easter-related effects and the core rate is still just above 1%. At this week’s meeting, we expect the ECB to give a strong signal of its intention to reduce asset purchases.
On the data front, we will see the German ZEW survey along with Eurozone industrial production. Expectations are for a modest improvement in both economic sentiment and industrial production.
EURUSD – 1.1805
EURGBP – 0.8796
The G7 leaders meeting ended badly at the weekend, with President Trump revoking his support for the communique. Trump blamed Canadian PM Trudeau, following some of the comments made alongside the official communication, with concerns around NAFTA negotiations. The US Dollar opened the week a little softer, though we have the Fed meeting later in the week, with expectations of a 25bps hike.
The inflation figure for May is expected to increase from 2.5% to 2.7%. As this comes just ahead of the Fed meeting on Wednesday, there is scope for some of the Fed’s rate-setting committee to suggest more hikes are coming. The ‘dot plot’ of expectations for interest rate hikes will, therefore, be closely watched. There is the potential that this moves higher to indicate four rate hikes in 2018, which would support the US dollar.
GBPUSD – 1.3421
EURUSD – 1.1805
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*Rates correct as at 9am on the date of publishing