Brexit Bites Britain Back
Sterling has been drifting lower for the past week due to concerns about the seeming lack of progress in the Brexit negotiations between the EU and the UK. The negotiations relate to the future trading relationship of the two sides and faltering talks are the key reason why Sterling remains under pressure.
Talks are supposed to resume on 1st June. The UK government has already ruled out any extension past the end of the year of the transition period for the UK’s EU exit. Markets also continue to speculate about the possibility of negative interest rates in the UK and some see this as adding to pressure on sterling. BoE policymakers this week once again confirmed that other policy options are likely to be considered first but didn’t completely rule out a move to negative rates. Similarly, in the US, Fed policymakers said negative rates were not being considered for now without ruling out the option
TIMELY UK DATA WATCHED FOR SIGNS OF A REBOUND
This week, May PMI data in Asia, Europe (including the UK) and the US all showed better outturns than April but remained below the 50 level marking an expansion in activity. The coming week’s data calendar is light but does contain some timely readings. In the UK, the CBI retail survey (Tue) will provide the first indications of consumer activity in May. The survey posted a record low in April but a major rebound seems unlikely this month considering that restrictions have only been eased very gradually. Friday’s GfK consumer confidence measure for May is a final estimate. The initial reading posted a further small fall to -34 from April’s record low of -33. In April, the vast majority of firms reported a negative impact on demand following the introduction of lockdown measures, while overall confidence fell near to the all-time low, hiring intentions slipped and wage and price pressures were more muted. The latest reading will be watched for some improvement in sentiment albeit from a very low base.
US DATA TO SHOW EXTENT OF DOWNTURN IN APRIL
The preliminary reading of US Q1 GDP showed the economy contracting by an annualised 4.8% - the biggest quarterly decline since 2008. The second estimate (Thu) will include later data returns and so may point to an even larger contraction due to the growing impact of the lockdown. GDP seems set to fall much more sharply in Q2 and April updates for durable goods orders & shipments (Thu), consumer spending and international trade in goods (both Fri) are all likely to point to very sizeable declines in activity. Meanwhile, the Fed’s preferred inflation measure the PCE deflator (Fri) is forecast to show an annual rise of only 0.4% in April. Weekly jobless claims (Thu) will be watched for further signs that the rise in unemployment may now be close to peaking. Finally, the Fed’s Beige Book will provide a timely anecdotal update on business sentiment.
EU COMMISSION TO UNVEIL RECOVERY FUND PROPOSALS
The main focus in the EU is likely to be the European Commission’s unveiling of its EU recovery fund (Wed) to provide economic support for countries that have been affected by the coronavirus. That follows this week’s proposals by Germany and France for a €500bn fund. However, some northern European countries have already voiced concerns about the proposal to provide grants (rather than loans) to countries without an adequate oversight on how those will be spent. The German IFO business survey (Mon) will be closely watched for confirmation that economic sentiment is starting to improve, although the strength of any recovery remains uncertain. We forecast the headline IFO index to rise to 78.8 from 74.3 in April, supported by increases in both the current assessment and expectations components. That level would still be lower than in March. The European Commission’s Economic Sentiment Indicators (Thu) are also expected to show some improvement from April. The Eurozone May ‘flash’ CPI report (Fri) is predicted to show a moderation in inflation, again mainly on the back of weaker energy prices. We forecast headline CPI inflation to decline to just 0.1%y/y from 0.3% in April, while core CPI (which excludes food and energy) is expected to edge down to 0.8%y/y from 0.9%.
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None of the information in this article is, nor should be construed as financial advice. All foreign exchange transactions involve risk and you should always seek your own independent financial advice before entering into any foreign exchange transaction.