This week, the focus moves back to data on employment and inflation. The March price data are forecast to show a decline in inflation, with energy prices falling this year. This significant fall will be offset by higher food prices and wage costs. Markets are expecting a fall below 10% from the 10.4% in February. We also expect ‘core’ inflation, which excludes food and energy prices to fall slightly to 6% from 6.2%, mainly due to lower goods prices. Inflation in services is likely to remain elevated, partly due to staffing issues and demand. This will be a concern for the Bank of England.
Before the inflation numbers, we will also see the latest labour market data. It is expected to show further steady easing in the very tight employment market. Employment is expected to show a very small rise, with the unemployment rate still likely to show 3.7%. Earnings growth will likely have eased further to 6.1% from 6.5%. This still remains well above the rate needed to fit with 2% inflation going forward. This will provide some further insight into Inflationary pressures and will add to the tricky decision the Bank of England is faced with at the May meeting.
With GDP unchanged in April and a mixed view from construction and industrial production, the figures out this week will give further insight into the economy. Following two months of increases, retail sales are likely to have fallen last month by around 1%. Consumer confidence is expected to have risen again in April, which would be the third month in a row. It is still low overall but reflects a steady improvement in sentiment. We will also see the April PMIs which are expected to show services in steady growth territory around 53 and manufacturing improving closer to growth at 49.
GBPEUR – 1.1300
GBPUSD – 1.2417
Following the positive industrial production figures last week, which saw a rise of 1.5% in February, we have a quiet week this week on the data front. The most notable release is the PMIs for April. We expect services to remain strong, though weaker than recent readings, at 54. In a similar vein to the UK, we also expect manufacturing to improve but remain in contraction territory at 48. We will also see whether the ZEW survey in Germany continues to improve.
Later in the week, we will get the policy minutes from the latest European Central Bank meeting. Given the improving picture in the economy and the recent rhetoric from the central bank, we don’t expect any surprises from the minutes. The upcoming May central bank decision may be finely poised for others, but for now, markets expect a further rise from the ECB.
EURUSD – 1.0988
EURGBP – 0.8850
The minutes of the Federal Reserve’s latest meeting showed that Fed economists think a mild US recession is likely later this year. This is in part due to the disruption in the banking sector with concerns of a regional bank-led credit crunch. Government policymakers including US Secretary Yellen downplayed the chance of an imminent recession. The IMF also forecast subdued growth rather than recession as the most likely outcome. All of this speculation has increased market expectations that interest rates are close to a peak and that rates could be cut later this year. Inflation fell sharply to 5%, which further swings the argument away from a tighter fiscal policy.
With all of the market speculation around interest rates, the dollar has continued to come under pressure. This is an indication that markets think the US economy faces greater risks than others. The markets are pricing in a much higher probability of interest rate cuts in the US, although the US appears to have higher GDP growth than the UK and Eurozone. This background means that the Federal Reserve is likely to have a tight decision on interest rates in early May. This week, manufacturing PMI is forecast to rise to 49.5 but as in the UK and Europe, to remain in contraction. Services PMI is likely to fall back from the recent high reading to 51.5, still showing growth.
GBPUSD – 1.2417
EURUSD – 1.0988
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*Interbank rates are correct at 7am on the date of publishing.