Parliament has been in recess for the past week and the news has been almost devoid of Brexit talk. Cross-party talks between the Conservatives and Labour have been continuing and will carry on as Parliament returns to Brexit talks today. In an interview last Sunday, David Lidington said that both sides were testing out each other’s ideas as they try and resolve the deadlock. They will no doubt take stock this week, with movement required by both sides.
Without a clear path forward, it is possible that the prime minister could have a final attempt to get her deal through the House of Commons. If that fails indications are that a series of votes would again be held to test whether any deal is able to command a majority in the House. In the meantime, a number of cabinet ministers have stressed that avoiding participation in the 23rd May European Parliament elections is a priority, though preparations are already underway.
The focus on Brexit means that markets continue to give little attention to UK economic developments. The only official release this week will be March public finances. This is likely to show a small net borrowing surplus. That would result in a public sector deficit for the full financial year very close to the Government’s forecast and about £19bn lower than the previous year. This potentially gives the Government room to boost spending. Last week’s data showed inflation was still below target in March. However, there were also indications that the labour market remains buoyant and of rising pay growth. Meanwhile, stronger-than-expected March retail sales added to the evidence that a resilient consumer is helping ensure that the economy continues to grow. This means that the Bank of England faces a mixed picture going into its May policy meeting
GBPEUR – 1.1538
GBPUSD – 1.2980
In the Eurozone, economic conditions continue to look tepid, forcing the German finance ministry last week to halve its 2019 economic growth forecast to only 0.5%. The Eurozone PMI’s for April were once again disappointing. The manufacturing reading did rise somewhat from what had been a six-year low in March but at 47.8 it remains well in contractionary territory. Meanwhile, services activity which had gone up for the past two months slipped back.
Wednesday’s German IFO survey for April will provide a further indication of economic prospects for the second quarter. Finally, it is worth noting that the central bank of Sweden, along with Canada and Japan, will all give policy updates this week, although none of them are expected to make any changes to their policies.
EURUSD – 1.1250
EURGBP – 0.8667
Concerns in markets about big downside risks for economic global growth are starting to fall away. News for China, in particular, has been positive. The slowdown in first quarter GDP growth was less than feared and March data for both industrial production and retail sales suggests a positive second quarter. Optimism that a trade deal between the US and China will soon be agreed is also on the rise. Further face-to-face talks between senior negotiators are scheduled for next week. There are rumours that a deal may be signed at a summit in late May.
The coming week will see the first estimate for US first-quarter GDP. Markets expect growth of 1.8%, which would be the weakest quarterly rate since early 2017. This may, however, have been impacted by the government shutdown that began on 22nd December. As a result of this and seasonal factors, stronger growth is expected in the second quarter. Data for US existing and new home sales and durable goods orders and shipments will provide indications of whether trade activity was strengthening at the end of the first quarter. Markets will also be watching earnings season, with many large corporations announcing results this week.
GBPUSD – 1.2980
EURUSD – 1.1250
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*Interbank rates correct as at 7 am on the date of publishing