The main highlight for the UK this week is inflation. Energy and other goods have pulled inflation lower to 8.7% from 10.1% in March. The drop in inflation was smaller than some expected with forecasts closer to 8%. This will keep pressure on the Bank of England, particularly with food inflation still running close to 20%. The BoE left the door open to higher interest rates after its latest hike although the panel hoped they had done enough in raising rates to 4.5%.
Last week’s labour data was softer than expected with unemployment increasing unexpectedly to 3.9%. There are signs that ‘inactive’ people are returning to the labour market. Private sector wage growth of 7% remains above levels the BoE would like to see to meet their inflation target and will remain a concern. Markets continue to price in expectations of at least another 0.25% rate increase.
The BoE and IMF have changed their forecasts recently and do not expect a UK recession this year. They acknowledged that the economy has been more resilient to the energy price shock than expected. This week, the PMI surveys may show a slight fall due to the extra coronation bank holiday. Meanwhile, March retail sales may also be weaker as a result of the wet weather and higher energy bills through the winter.
GBPEUR – 1.1532
GBPUSD – 1.2436
The Eurozone focus this week has been on the Eurozone PMI figures and the German IFO business survey. The PMIs continue to show expansion overall, at a slower pace than in April. The survey showed manufacturing (44.6) lagging behind a more buoyant service sector (55.9). The German IFO index dropped to 91.7 following increases for the last six months. Despite some of these weaker figures, the expectation is that the ECB will continue to raise rates next month.
EURUSD – 1.0784
EURGBP – 0.8672
This week we will see the Fed’s preferred inflation measure, the PCE deflator. This is expected to be in line with last month, just above 4%, though the core index will likely have risen slightly again. The Fed is still expected to pause its sequence of rate hikes in June, but higher inflation could change this. We have a number of Fed speakers this week and the FOMC minutes which could also give further insight into their latest thoughts.
We will also see the second estimate of Q1 GDP which is likely to be 1.1% annual growth. The personal spending figures are expected to show 0.4% growth in the month, suggesting that consumer spending is holding up. This also bodes well for the economy in the second quarter. The US debt ceiling remains a bone of contention. Ongoing negotiations and President Biden’s positive sentiment give some hope that a solution will be found, but time is running out as a default could happen in early June without agreement.
GBPUSD – 1.2436
EURUSD – 1.0784
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*Interbank rates are correct at 7am on the date of publishing.
