Last week, we saw another fall in consumer confidence which fell to -38 in the GfK survey. The last time we saw such a low level was at the time of the global financial crisis. This also fed into retail sales which fell more than expected in March. The services PMI, also fell, though still showing strong growth at 58.3. As a result of these softer data, we saw sterling falling further, back below 1.28 ($) and 1.19 (€).
This week we will see the April CBI industrial and distributive trends surveys. These are likely to show a further softening in demand. Overall growth over the course of this year may well be lower than the most recent Bank of England forecasts. This will no doubt feed into the Bank of England decision on 5th May.
There are no scheduled Bank of England speakers this week, as we are in the quiet period before the meeting next week. The Bank has indicated that further policy tightening ‘might’ be appropriate in the coming months. It remains to be seen how they will approach the more challenging economic outlook. This will remain a balancing act with inflation set to rise above 8% in April. A further 25bp increase in interest rates to 1% next month is expected, though the Bank of England seems to be less hawkish on rates than the Federal Reserve.
GBPEUR – 1.1879
GBPUSD – 1.2797
This week, we will see first-quarter GDP to increase by 0.3%. This will be the same rate of growth as the final quarter of last year. The most recent Eurozone PMIs pointed to some resilience with services rising to an eight-month high of 57.7.
However, indicators of future output have fallen since the invasion of Ukraine in February. This week we will get updates on the German IFO business survey and the Eurozone economic confidence report. Inflation may also fall back slightly to 6.9% from 7.4%. Inflation will clearly remain above the 2% target through this year. Some ECB rate-setters have raised concerns over how quickly it will fall back to the target level. Markets now expect the ECB to bring the deposit rate (-0.5%) out of negative territory by the end of the year.
Incumbent president Macron managed to retain his presidency in a relatively close run-off against his far-right rival Marine Le Pen. France will now hold legislative elections in June which could result in the President not having a majority in the National Assembly.
EURUSD – 1.0775
EURGBP – 0.8420
The first estimate of first-quarter GDP will be released this week. It is likely to show a sharp slowdown in quarterly growth to 1.3%. This will be much lower than the 6.9% rate in the fourth quarter mainly due to weaker inventory growth.
Meanwhile, the PCE deflator, which is the Fed’s preferred inflation measure, will show another rise in the headline rate to around 7%. There are signs that inflation may be peaking, but it will probably not fall quickly in quarters to come. Housing sales seem to show some signs of higher interest rates having an impact on consumer confidence falling, although housing starts appear to be holding up for now.
The Federal Reserve speakers will also be quiet ahead of the policy update on 4th May. Chair Powell has confirmed that a 50 basis point rise is possible at this meeting. Markets see this as the most likely outcome. The Fed’s balance sheet will also likely start to be reduced.
GBPUSD – 1.2797
EURUSD – 1.0775
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*Interbank rates correct at 7 am on the date of publishing.