GBP – Economy improves but concerns remain

Last week’s data gave further evidence of a rapid economic rebound as lockdown restrictions ease.  Retail sales for March rose at the fastest rate for 9 months.  Online sales helped retailers which will be further boosted the reopening of shops in April.  The April PMIs figures also point to a strong start for the second quarter in manufacturing and services activity. Both readings came in just above 60 and suggesting accelerating growth. 

Inflation also showed an expected rise, up to 0.7% annually in March.  The core measure was even higher at 1.1%, but these rises are seen as temporary, similar to elsewhere.  Meanwhile, employment fell by 73,000 to February, though the unemployment rate also fell to 4.9%.  This suggests there are plenty of people not actively looking for work. 

This week, there is not much new data to consider, with only the CBI retail survey and the shop price index from BRC.  Whilst we wait for updates to economic activity in May, the signs for April look increasingly positive.  Concerns do, however, remain on whether the recovery could peter out if there is further bad Covid news, such as from new variants. 

GBPEUR – 1.1478

GBPUSD – 1.3897

EUR – ECB dovish with EU recession

Last week’s update by the ECB was again dovish. So far, central banks have been reassuring that monetary policy will not be tightened any time soon. European Central Bank chief Lagarde said there had been no discussion of slowing bond purchases. The Swedish Riksbank and Bank of Japan are providing updates this week and are expected to maintain policy with a similar tone. 

We will see the first-quarter GDP for the Eurozone area this week.  It is expected to have fallen by 0.8% with a major contribution by the service sector impacted by restrictions. Assuming that GDP does fall, it would be the second quarter in a row meaning the economy is in recession for the second time in 12 months. 

Looking ahead, the April PMIs suggest that GDP will rise in the second quarter despite ongoing restrictions. Manufacturing was again solidly above 60, whilst services rose back above the 50 level marking expansion.  The April German IFO survey is expected to provide further evidence of the improving situation. We will also see the April CPI report, with inflation expected to rise to 1.6%. This again is expected to be driven by higher energy prices.

EURUSD – 1.2108

EURGBP – 0.8712

USD – Fed expected to remain dovish 

On Wednesday the Fed seem certain to leave monetary policy unchanged. They may adjust their forward guidance given the positive economic data. However, Fed policymakers have repeatedly said that policy needs to remain very supportive of the economy’s rebound. A very dovish message remains most likely. 

Government bond markets have seen a further fall in yields from the April highs, suggesting that markets accept rates will not need to move soon.  The US dollar has been back under pressure, moving back above 1.20 against the euro.  

GDP figures are expected to show that the economy grew and at an accelerated rate above 7% in the first quarter. That reflects less onerous restrictions than in Europe and support from monetary policy and the fiscal stimulus package. Monthly consumer spending for March is likely to show strong spending supported by the Biden fiscal package. President Biden will testify to a joint session of Congress on Wednesday for the first time since his inauguration. 

GBPUSD – 1.3897

EURUSD – 1.2108

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*Interbank rates correct at 7 am on the date of publishing.