Last week provided an early indication that we may see a recovery in the second quarter after the first quarter slowdown, though sterling remains weak. Retail sales for April showed an increase of 1.6%, in a strong improvement from March’s decline. There are expectations that the data will continue to show an improvement in activity with second-quarter GDP expected to increase to around 0.4%. A number of members of the Monetary Policy Committee (MPC) suggesting firmer growth is expected to the Treasury Select Committee last week. Inflation is expected to prove ‘sticky’ in the coming months, which may lead the MPC to increase rates in August. The likelihood of a hike is only around 30% currently.
This shorter week has limited data for the markets to watch, with only manufacturing PMI and GfK consumer confidence reports. They are expected to show more solid growth, but in the meantime, sterling remains weak.
GBPEUR – 1.1450
GBPUSD – 1.3240
The Italian political situation worsened over the weekend following the President’s veto of the Five Star/League’s preferred choice of finance minister. There has been a backlash from politicians from both the Five Star and League parties. Analysts are concerned about the prospect of fresh elections later in the year. The yield on Italian government bonds has increased further. The spread of 10yr Italian bonds over their German equivalent is now more than double a month ago (2.5%).
Despite the recent slowdown and uncertainties around Italy, reports suggest that the ECB remain keen to end their bond-buying program this year. Recent surveys of euro-area economic activity have been mixed. Analysts expect that underlying momentum will eventually result in a rise in domestic price pressures.
This week’s May inflation figure is expected to show some support from domestic price pressures. An unwinding of Easter-adjusted effects and higher oil prices should have caused a sharp jump in both headline and core inflation. Against this backdrop, analysts will we closely watching the European Central Bank speakers over the course of the week.
EURUSD – 1.1563
EURGBP – 0.8734
The minutes from the May of the rate-setting Federal Reserve suggested they are on track to increase rates by a further 0.25% at the next meeting in June. There is little clarity in the path of rates beyond June. Some, but not all members remain concerned over the resilience of inflation and inflation expectations. This leaves a divided Committee and uncertainty whether we see one or two additional interest rate increases. The prospect of more aggressive US rate increases will depend on how durable and persistent inflation increases appear.
This week, the core PCE deflator will provide further information on the inflation outlook, expected to fall from 1.9% to 1.8%. The broader outlook will depend on economic performance and the next update on US labour market trends and ISM manufacturing should provide further insight. Most indicators, including very low unemployment claims, suggest that the labour market remains buoyant. Non-farm payrolls will as be much talked about as usual this week with a pick up towards 200,000 expected.
GBPUSD – 1.3240
EURUSD – 1.1563
Do get in touch if you would like to discuss further.
*Rates correct as at 9am on the date of publishing