The main event of the past week was the monetary policy update from the Bank of England. With the slowdown in recent economic data and comments from Governor Carney, it was no surprise to see the potential rate hike delayed. The focus was therefore on the monetary policy committee’s future intention. Their view is that recent weakness is likely temporary and at least partly weather-related, meaning a rate hike is only delayed. The initial reaction to the announcement saw sterling at its lowest level in 2018 against the US dollar. The central bank’s comments seem consistent with a rate rise in August and its forecast includes three rises of 0.25% over the next three years.
The week ahead is fairly light though tomorrow’s labour market data will be closely watched. The employment gain for the three months to March will highlight underlying economic strength. Wage data will also be watched for further signs that a tighter labour market is causing pay increases. Brexit negotiations remain another key driver of the pound. In the Sunday Times, Prime minister May asked for unity, as the government continues to work on options to replace the current EU arrangements.
GBPEUR – 1.1336
GBPUSD – 1.3584
In Europe, Italy’s populist League and Five Star Movement parties are reportedly on the verge of agreeing a government plan, which may include a flat tax and a minimum income for citizens. Their policies would likely raise Italy’s already high debt levels. President Mattarella has indicated that he may not rubber stamp the agreement, which could raise the risk of new elections.
German GDP growth is expected to have slowed to 0.3% in the first quarter. This would be further evidence of the slowdown in the Eurozone, although the overall number for Eurozone growth remains at 0.4%. Some more positive growth signs are now starting to emerge in the region. Increases in industrial production in March for some of the largest economies in the region suggests a bounce in Eurozone output. Meanwhile, over the next couple of weeks data for May will start to emerge starting with Tuesday’s German ZEW survey. We expect both the current conditions and future expectations to have improved from April.
EURUSD – 1.1983
EURGBP – 0.8821
President Trump’s decision to pull the US out of the nuclear agreement with Iran provided further jitters for the markets. Oil prices increased as a result though there are also concerns that a renewal of US sanctions may negatively impact European companies. US Secretary of State Pompeo is scheduled to talk to European allies to get them on board. US and Chinese officials are due to discuss trade relations before a visit to Washington by one of China’s top economic officials. Meanwhile, US inflation rose by 2.5% in April.
The data of most interest this week will be April retail sales tomorrow. After disappointing in the first two months of this year, sales were much better in March. Another expected monthly rise in April of 0.4% will further highlight the current strength of the US economy. This would mean that consumer spending makes a substantially larger contribution to second quarter GDP growth. Also of interest will be April industrial production and housing starts. Both are expected to support the positive upward trend in the US economy.
GBPUSD – 1.3584
EURUSD – 1.1983
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*Rates correct as at 9am on the date of publishing