Despite a turbulent week in politics, the UK outlook appears relatively positive. The UK monthly GDP released last week showed positive momentum growing. We also expect to see positive UK labour market data and retail sales this week which will further bolster the picture of second-quarter growth. We also expect to see inflation accelerate for the first time since the end of last year to 2.9%. This recent run of data will only add to the expectations of a rate hike in August. Bank of England Governor Mark Carney, speaking this week, has made it clear that the Bank of England will look at the data rather than the political situation.
That said we have another important week for UK politics. The customs and trade bills put forward in the government’s white paper votes in parliament. How they get on will be a litmus test for Theresa May and future negotiations. The customs bill vote is expected to be the bigger challenge. Hardline brexiteers within the Tory party have already proposed several amendments. These votes are another in the long line of challenges faced by Theresa May and there is still a chance of a vote of no confidence in her leadership. It will also be important to see the EU’s reaction to the proposals. Whilst it is not their ideal scenario, they will be well aware of the tension within the UK parliament and the risk is pushing for further concessions.
GBPEUR – 1.1328
GBPUSD – 1.3239
The European Central Bank released its minutes from its recent meeting. At that meeting, the ECB announced the tapering of quantitative easing and pledged to keep interest rates at current levels through the summer of 2019. The minutes of the meeting were as dovish as Mr Draghi at the time which sent the Euro lower.
This week, the final reading of inflation for June is unlikely to cause much reaction in the markets. Inflation is expected by analysts to remain at 2.0%. Politics remain important in Europe with any response regarding the US tariffs closely watched as further tariffs for Chinese goods were announced. The IMF will release their World Economic Outlook this week which will provide an opinion on the effect of trade tensions. The markets will also watch for any EU reaction to the UK’s white paper on leaving the EU.
EURUSD – 1.1687
EURGBP – 0.8827
Markets were shaken by the US imposition of tariffs on a further USD200bn of Chinese imports which is due to take effect in August. With the tension from additional tariffs alongside worries of a slowing economy in China, a weaker GDP reading this morning only adds to concerns. As politics remains equally important, analysts will watch for further trade-related comments or a response from China.
Federal Reserve Chairman Powell will testify to a Senate Panel with markets watching for comments on the trade-war and changes to interest rate curves. Economic growth continues to look strong with retail sales expected to show continued strength this week. US headline inflation came out as expected at 2.9%. Against this backdrop, comments from Powell around impact from the trade tensions, and the longer term expectations for interest rates will be analysed for changes to current expectations. The markets are concerned about short-term interest rates rising above longer-term rates, which tends to suggest a slowdown.
GBPUSD – 1.3239
EURUSD – 1.1687
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*Rates correct as at 9am on the date of publishing