Prime Minister Theresa May will stand down in early June. Her position became untenable as her plans to bring the EU Withdrawal Bill back to Parliament unravelled. She will remain until 7th June after president Trump’s visit, and then until a new leader is chosen. Sterling has been sliding as the political uncertainty increases. It moved below 1.27 against the US dollar and below 1.14 against the euro. The process for finding PM May’s successor has already seen many prominent Brexiteers join the leadership race. The markets will continue to speculate about the potential Brexit strategy of the next leader and whether she or he will be willing to pursue a ‘no deal’ exit. Once May stands down, the new leader will still face a House of Commons where a majority of MPs oppose leaving the EU without a deal.
The Conservatives and Labour endured their worst ever electoral results in the European elections. Between them, they only took 23% of the vote, well below their previous all-time low of 43.5%. The votes were broadly even between Brexit and Remain supporting parties, reflecting the closeness of the original referendum result. The Brexit Party won 32% of the vote and the pro-remain Lib Dems (20%) and Green Party (12%) posted a similar level of support, which increases further if the SNP are included.
The coming week’s economic data calendar is very light. Consumer confidence has been unchanged for the past three months. We expect it to have moved up marginally in May partly due to seasonal factors, but that will still leave it below the 2018 average. The Bank of England will also release its April money supply and bank lending data including mortgage approvals. Last week inflation rose to 2.1% from 1.9% while retail sales were unchanged in April after strong gains in the first quarter.
GBPEUR – 1.1332
GBPUSD – 1.2677
There will be an EU summit on Tuesday’s where the repercussions of this week’s European Parliamentary elections will be discussed. Marine Le Pen’s far-right National Rally won with 23.3% of the votes, beating French president Emmanuel Macron’s alliance. In Italy, the right-wing Lega Party took victory with 34.3% of the vote. Euroskeptic Salvini said that he will try to form an anti-EU bloc with Marine Le Pen and Hungary’s Viktor Orban. Orban scored a huge win after his Fidesz party received 52.3% of the country’s votes. The Green Party alliance posted its strongest ever performance in European elections, winning 69 seats. Greece’s Prime Minister Alexis Tsipras said he would call a snap election after a poor performance for his party at European and local elections.
EU leaders will also need to talk about the key EU leadership roles that will need to be filled this year, including the Presidents of the Commission, the Council and the ECB. The EU may also want to agree on a response to potential requests from the UK to renegotiate terms or a further extension of the withdrawal deadline as May stands down.
The four largest Eurozone economies all release May CPI readings this week, ahead of the estimate for the region as a whole next week. Eurozone inflation picked up in April but much of that seemed to reflect a later Easter compared to 2018. We expect inflation to have moderated in May. Last week’s PMI and Germany IFO May readings provided further indications that the surprisingly strong first-quarter GDP won’t be sustained. The Eurozone economic confidence measure will provide further guidance on this, with the already released consumer confidence indicator pointing to a modest increase.
EURUSD – 1.1193
EURGBP – 0.8825
The past week was another rocky one for equity markets as trade tensions between the US and China continue to weigh on sentiment. Meanwhile, government bond yields have fallen as investors look for safe havens. There have been no further signs of negotiations restarting. There is no confirmed date for any new meetings ahead of the plans for the US and Chinese Presidents to talk at the G20 summit in late May. The US is still threatening to raise tariffs on other imports from China but has provided no further information on the timing of this. Instead, the past week has seen a change of tactic, with the US government threatening restrictions on the access of some Chinese companies to US technology. Markets will be looking for further information on any potential restraints on technology exports in the coming days.
It is also a holiday-shortened week in the US and a correspondingly light data calendar there. The second reading for first-quarter GDP is not expected to change significantly from the initial estimate. That showed surprisingly strong overall growth, although consumer spending slowed compared to last year. More positively, an acceleration in spending in March meant that the quarter ended on a strong note. Markets will be looking to see whether the April data due Friday shows that continuing. However, the disappointing April retail sales point to another deceleration. The Fed’s preferred inflation measure, the consumer expenditure deflator, will be released at the same time and is expected to show that inflation continued to run below target in April. Minutes of the May Fed meeting confirmed its intention to be ‘patient’ on rates but gave no indication that a cut was imminent.
GBPUSD – 1.2677
EURUSD – 1.1193
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*Interbank rates correct as at 7 am on the date of publishing