Markets remain spooked by the ongoing trade tensions flare up. Meanwhile, cross-party talks between Conservative and Labour ministers have been going on for six weeks without a breakthrough. A Government spokesperson described the talks as “constructive and detailed”. However, comments from Labour suggested the Government will need to move its red lines to achieve a deal. Prime Minister May remains under fire from her own party, though no leadership challenge looks likely in the short term. There is still a feeling that Mrs May will bring her EU Withdrawal deal back to the House of Commons for another vote before the European Parliament elections on 23rd May. This would need to happen next week, after which we have a parliamentary recess for two weeks. This may further delay progress on Brexit.
Last week’s key data showed first-quarter GDP increasing by 0.5% from 0.2% at the end of last year. This week’s data calendar is very light with little to distract markets from trade tensions or Brexit. The only notable data is the labour market report to February. Recent reports have shown a tight labour market and an upward move in wage growth. This has caused the Bank of England to increase the chance and potential size of future rate hikes. We expect strong employment growth and the unemployment rate to remain at 3.9%. Wage growth may not be as strong which would give the Bank of England some room for patience.
GBPEUR – 1.1585
GBPUSD – 1.3010
Last week saw stronger-than-expected March estimates for industrial production within Europe. This has helped to boost hopes that the rebound will continue into the spring. There remain concerns that the upturn will prove temporary and surveys for May in the coming weeks will give an indication of whether this will be the case. This week’s ZEW expectations reading can be useful. Markets expect a sixth successive monthly rise. German industrial production rose 0.5% in March, though French, Italian and Spanish output all fell.
The second reading for first-quarter Eurozone GDP is expected to be in line with the initial estimate of 0.4%. Meanwhile, German GDP is likely to continue the picture that economic growth picked up in early 2019. Markets expect growth of 0.4%, which would be a marked increase from the end of last year with no growth.
EURUSD – 1.1230
EURGBP – 0.8632
Trade tensions flared between the US and China which led to a volatile week in global stock markets. The US followed through on threats and raised the tariffs on $200bn of imported from China to 25% from 10%. President Trump said that the action due to China backtracking on commitments and suggested further tariffs could be applied. China has indicated that they will retaliate against the measures, though it remains to be seen what form this may take. There have been signs that Chinese economic growth is picking up, though it remains to be seen whether the economy is strong enough to weather negative impacts from a trade slowdown.
Last week, US April CPI inflation rose to 2.0% from 1.9% with ‘core’ inflation increasing to 2.1% from 2.0%. The consumer sector started the year slowly but picked up sharply in March. Market analysts expect another solid rise in April driven by strong ‘core’ sales offsetting a slowdown in spending in automobiles. Overall, the fundamentals for consumer spending remains very supportive, with strong employment growth, and wages rising more quickly than inflation. Also of interest will be April industrial production and housing starts.
GBPUSD – 1.3010
EURUSD – 1.1230
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*Interbank rates correct as at 7 am on the date of publishing