Reading The Signals
There are signs that the UK government is reviewing lockdown measures and PM Johnson could announce at the weekend (7pm on Sunday) a limited easing of restrictions to take effect from Monday. According to media reports, the “stay home” message could be replaced and some workers could be encouraged to return to work. Chancellor Sunak, meanwhile, is reportedly looking to wind down the government’s employee furlough scheme after June.
Global risk sentiment has been broadly positive this week as countries gradually reopen (or move closer to reopening) their economies.
There remains a degree of optimism in the financial markets that the gradual reopening of economies will result in a recovery in the global economy in the second half of the year. The BoE is predicting about a 30% plunge in UK GDP in H1, but its central scenario sees activity picking up “fairly rapidly” in H2 as social distancing restrictions are gradually lifted. The Bank said, however, that the outlook is “unusually uncertain”, especially relating to the virus and the potential long-term ‘scarring’ effects of the current lockdown measures on the economy. The Office for National Statistics will release official Q1 GDP (Wed) which we expect to show a quarter-on-quarter contraction of 3.2% (consensus: -1.9%) with the introduction of lockdown resulting in a severe drop in March activity. The breakdown of the March data by sector will be interesting reading, although with the caveat that that there will have been issues in collating the data and they should therefore be treated with more care than usual.
However, there remained concerns about the US-China spat on allegations of the latter’s Coronavirus cover-up. The likelihood of more policy stimulus by the Bank of England, however, weighed on the pound which fell to the lower end of recent ranges against the US dollar (towards $1.23), but fared better against the Euro with the latter weighed down by a German constitutional court ruling which questioned whether the ECB’s asset purchases were excessive.
The BoE left interest rates unchanged at 0.1% and maintained its QE programme at £645bn, but reaffirmed its readiness to provide more stimulus if necessary. The outcome was in line with expectations, although two of the nine-member monetary policy committee voted for an immediate increase in bond purchases of £100bn. The committee will revisit the case for more QE at the next meeting on 18 June, especially as the current £645bn limit is expected to be reached in early July. Economic data in major economies remained dire and continued to surprise mostly on the downside. In Europe, lockdown measures are expected to be eased further in Germany this weekend (restaurants and hotels can reopen), while restrictions will start to be lowered in France next week allowing, for instance, small shops to reopen. Germany will release Q1 GDP (Fri) which we think will show a quarter-on-quarter fall of about 1.8% (consensus: -2.0%), less than the aggregate Eurozone figure of -3.8%. Eurozone March industrial production (Wed) probably slumped by 10.5% on the month, judging by German and French numbers and with an estimate of a particularly severe contraction in Italian industrial output (Mon).
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See you next week!
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.
