The big news expected this week is Chancellor Jeremy Hunt’s first Budget on Wednesday. Government borrowing is expected to be lower due to a stronger tax take and lower wholesale energy prices. If this is the case and borrowing is around £30bn lower than predicted, Chancellor Hunt will have come scope to provide further support to households and businesses. It has been widely circulated that the Energy Price Guarantee will be maintained at £2,500 instead of the expected rise to £3,000 for a typical household.
There will likely be a measure of caution in the budget as the recent improvements in public finances may change again. We will see the new economic growth forecasts from the OBR, with growth likely to be revised up for this year. We may well see some focus on boosting labour force participation to alleviate recruitment difficulties along with widely touted measures around pensions and childcare reform. Investment spending to drive up productivity growth has also been touted as a potential measure.
Last week started with news of a positive start to the year with an increase of 0.3% in monthly GDP. This was mainly due to a rebound in services. Survey evidence suggests there have been improvements in business and consumer confidence. We will see whether this positivity continues this week with the labour market report, where wage inflation is expected to drop back slightly to 5.8%, though unemployment may rise to 3.8%. Following the failure of Silicon Valley Bank last week, HSBC has taken on the UK bank which is expected to minimise the disruption to the UK tech and medical science sectors.
GBPEUR – 1.1292
GBPUSD – 1.2107
The major news in the Eurozone this week is the Central bank meeting. The European Central Bank will provide its policy decision on Thursday. The markets are widely expecting a further 0.5% increase to 3%. The rate-setters will no doubt have further discussions around the policy outlook going forward. Some of the more hawkish members are concerned about rising core inflation and want to continue raising rates to hold down inflation. On the other side, some of the more dovish members argue that inflation is coming down and the full impact of previous hikes will continue to have an effect. As a result, the new forecasts and President Lagarde’s comments at the ECB press conference will be closely watched.
Beyond the ECB decision, we will also have an update on industrial production and the latest inflation figures. The week finishes with the OECD interim economic outlook. This will be an interesting set of forecasts alongside the ECB and UK OBR forecasts.
EURUSD – 1.0722
EURGBP – 0.8856
The last week has been volatile for the US dollar. This has been driven by changing interest rate expectations and concerns about contagion after Silicon Valley Bank and Signature Bank collapsed. The government has said that depositors will be able to access their money in SVB from today. The dollar has given back the gains it made last week after hawkish comments from the head of the US Federal Reserve, Jerome Powell. Following these remarks, the markets were moving towards more or larger hikes, but there may now be no hike at the next Fed meeting.
The latest US monthly jobs data showed that 311,000 jobs were added in February in addition to the 504,000 in January. The unemployment rate did however increase to 3.6% with softer 4.6% wage growth. With the mixed data, of strong employment, but weaker wage inflation alongside concerns over the impact of these latest banking failures, the direction and size of Fed rate hikes have become far less clear. Markets are still forecasts rates to reach around 5.5% in the summer.
This week, we will see further retail sales, housing, and industrial production data, and the University of Michigan consumer sentiment survey. We anticipate a further fall in inflation close to 6%. The core inflation rate is likely to remain sticky and may only fall marginally to 5.5%. In retail sales, there are indications that car sales may have softened, though markets expect robust retail sales overall in February.
GBPUSD – 1.2107
EURUSD – 1.0722
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*Interbank rates correct at 7 am on the date of publishing.