This morning’s news that the UK economy shrunk in April by 0.1% had been predicted by the market but will nevertheless have disappointed an already beleaguered Chancellor of the Exchequer after last month’s surprise expansion.
Yesterday’s resignation by both the defence secretary and armed forces minister, blaming a failure to spend enough to defend the country or its own military, has added pressure on the prime minister and Rachel Reeves, his chancellor. This time next week we will be digesting news of the Makerfield by-election and the likelihood of a change of prime minister, but before that we come into a period of high-level data for the UK economy, including inflation, employment and earnings midweek.
This was the first fall in Gross Domestic Product (GDP) since last August, as the impact of the war in Iran was felt, and comes a week before the Bank of England (BoE) decides on interest rates.
Yesterday the European Central Bank (ECB), was the first to jump, raising by 0.25% for the first time in nearly three years. Normally an interest rate rise from a central bank will boost a currency, but yesterday’s from the ECB was already priced in and was overshadowed anyway by renewed threats from Donald Trump that the Iran conflict was likely to ratchet upwards.
Despite that, the price of Brent Crude fell again, to its lowest level since the first week in March. In other critical prices, after a month of depressing news about the UK housing market (at least for owners) yesterday there was a sign of thawing. The Royal Institution of Chartered Surveyors’ (RICS) monthly survey found that surveyors were at least no more pessimistic about the housing market, and that for the first time this year new buyer enquiries had not fallen. How that will survive the changed interest rate environment remains to be seen.
GBP: Markets wait for more data
There was barely a blip in the value of the pound this morning as the first GDP slip for nine months was recorded. That could change as a fresh week of high-level data leads to the BoE decision on Thursday and the make-or-break by-election for the government. A critical week then, but in the meantime sterling remains close to its year-long high against the euro. It looks poised, but whether for more strength or weakness remains the great unknowable.GBP/USD: the past year
EUR: Interest rate rise no surprise
As with its interest rate reductions exactly two years ago, the ECB has been the first to move on raising rates and is already predicting two more rises this year. The blame falls firmly on price rises caused by the war in the Middle East, with inflation not predicted to return below 2% until 2028. Given that, upcoming economic data including the ZEW Economic Sentiment Index seem unlikely to be as impactful as they might, and Middle East news will be to the fore.GBP/EUR: the past year
USD: Dollar weakens despite oil threat
After a strong week, trading on the additional risks to the world economy as the Middle East ceasefire falters, yesterday the dollar weakened. This was despite Producer Price Inflation (PPI) remaining above expectations. Today we’ve got Michigan Consumer Sentiment and next week builds to the interest rate decision from the Federal Reserve on Thursday – the first under the chairmanship of Trump favourite Kevin Warsh.USD/GBP: the past year
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 3918 7255 or your Private Client account manager on 020 7898 0541.
