Parliament will return from recess tomorrow and the focus will be on the Tory leadership election set to kick off next week. We have already seen the start of the posturing by the Tory leadership contenders. This week, attention may shift away from the contest as President Trump visits the UK. In a break with protocol, Mr Trump has already given his backing to Boris Johnson and Nigel Farage. Nevertheless, with MPs back at Westminster it may become more apparent as to which candidates are drawing the most support. In the meantime, the Peterborough by-election will provide a further indication of support for each of the political parties.
This week’s data calendar is again fairly light with no official releases of note. However, the May PMIs will provide some further timely updates on UK growth. The manufacturing PMI slipped In April, following a particularly strong reading for March that seemed to have been primarily driven by pre-Brexit stock building, but it stayed well above the 50 expansion/contraction level. In contrast, both the construction and services indicators rose back above 50 in April. We expect another modest decline in manufacturing for May, but increases in both construction and services. Overall these surveys point to weaker economic growth in the second quarter following the most recent 0.5% rise
GBPEUR – 1.1309
GBPUSD – 1.2638
This week’s calendar for the Eurozone is busy. The May Eurozone PMIs and first quarter GDP are both final estimates, which are likely to remain unchanged from their initial readings. Eurozone April retail sales and industrial production will be of more interest in Germany, France and Spain. Each of those will be watched for further indications whether economic growth in the region has slowed since the first quarter’s surprisingly strong GDP growth of 0.4%. Meanwhile, May releases for CPI inflation in the four largest Eurozone economies point to a slowdown in Tuesday’s reading for the region as a whole which will leave it further below the 2% inflation target.
We do not expect the ECB’s Governing Council to make any changes to its policy guidance. ECB President Draghi is likely to confirm that the ECB’s baseline forecast is still recovery from the current ‘soft patch’. He will likely emphasise that the risks to this remain to the downside. For now, it will stick with guidance that only rules out an interest rate hike before the end of this year. The ECB eventually will have to acknowledge that rates are unlikely to go up before the middle of next year at the earliest.
EURUSD – 1.1175
EURGBP – 0.8843
Ongoing concerns remain about trade tensions between the US and China. These concerns have escalated into more general doubts about risks to global economic growth. Trade tensions have also headed to Mexico, along with three heavyweight boxing belts! President Trump plans to raise tariffs on goods from Mexico unless the Mexican government curbs illegal immigration. With investors looking for safe havens, government bond yields have fallen sharply.
The week ahead has a much busier calendar for data. This will culminate with Friday’s labour market report for May. Markets expect roughly a 200,000 monthly rise in employment. The unemployment rate is likely to hold at a low of 3.6% with further moderate wage gains. Ahead of that, the May ISM manufacturing and non-manufacturing surveys, along with official reports on April construction spending, factory orders and international trade will provide insights into key parts of the economy. We expect a series of generally relatively solid reports, but it remains to be seen whether they will do anything to help calm market fears.
In the meantime, the next Fed policy meeting in two weeks is shaping up as a key date for markets. Some analysts are convinced that US interest rates will be cut before year-end. In early May, Fed Chair Powell acknowledged that he and his colleagues would continue to be ‘patient’ before taking any further policy action but played down the possibility of a near-term rate reduction. That briefly led to a fall in the probability markets placed on a 2019 cut, but it has subsequently rebounded and now stands at more than 90%.
GBPUSD – 1.2638
EURUSD – 1.1175
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*Interbank rates correct as at 7 am on the date of publishing