Last week, the Bank of England left Base Rate at 0.1% and maintained the current pace of asset purchases. Overall, the signal from the BoE is that policymakers are comfortable with the rise in bond yields because it reflects optimism about the economic recovery. Consumer confidence appears to back this up. The BoE seem happy to signal no policy rate rise for a considerable period of time.
The government is maintaining the roadmap out of lockdown although there are expected to be delays in vaccination rollout due to supply issues. GfK consumer confidence increased last week to a one-year high. The unemployment rate is likely to remain steady at 5.1%. The Office for Budget Responsibility now expects a lower unemployment peak at 6.5%. Along with the successful vaccine campaign, this could lead to pent-up consumer demand later in the year.
The flash PMI surveys for March are likely to confirm stronger economic activity. We expect services PMI to rise to 50.4, which would be the first expansion since October. The manufacturing PMI may fall, but will still show expansion, likely around 54.2. This would continue to paint a positive picture for the UK economy.
GBPEUR – 1.1656
GBPUSD – 1.3851
The European Council meet at the end of the week and one of the key issues will be the response to the pandemic crisis. The EU’s vaccine rollout has been sluggish. Confidence has not been helped by the pause, due to safety fears, in the deployment of the AstraZeneca jab. There may well be restrictions on movements of EU produced vaccines out of the EU. New lockdown restrictions have been implemented in France for a month to tackle the third wave of infections.
We expect the Eurozone services PMI to fall slightly to 45.8, contracting for seven months in a row. Manufacturing activity has been less affected by containment measures and will likely still be strong around 56.5. The German IFO survey will provide an update on business sentiment. The headline index is likely to rise but remains below it’s the historical average. This doesn’t bode well for the European economy, Further, the delay in the disbursement of the EU’s €750bn recovery fund contrasts with the delay in the disbursement of the EU’s €750bn recovery fund not helping.
EURUSD – 1.1883
EURGBP – 0.8579
The US Federal Reserve also maintained policy settings. They signalled no rate rise until after 2023 despite upgrades to growth forecasts. US Treasury yields continue to climb, with 10-year rates reaching pandemic highs of 1.75%. A sustained rise in inflation seems some distance away given significant slack in the labour market and the economy more generally.
A number of Fed officials are scheduled to speak this week and their comments on this will be closely watched. Fed Chair Powell and Treasury Secretary Yellen will jointly appear in Congress to testify on the measures taken in response to the pandemic. This includes the latest $1.9 trillion fiscal package.
US retail sales, industrial production and housing starts fell more than forecast in February. This week, personal consumption is expected to decline by 1.5%. A better guide to activity may come from the manufacturing and services PMIs. These are likely to show strong growth, close to 60 for both measures, in contrast to the European figures.
GBPUSD – 1.3851
EURUSD – 1.1883
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*Interbank rates correct at 7 am on the date of publishing.