We saw the US Dollar strengthen across the board last week as a “risk off” tone took effect in global markets. The change in sentiment was driven by concerns surrounding the speed of economic rebound as well as the growing tensions between the US and China.
Compounding the negative sentiment were comments from US Fed Chair Powell and BoE Governor Bailey in interviews last week. Both Powell and Bailey highlighted concerns that economic recoveries may be slow and that there are risks that the downturn may cause more permanent damage to economies. In addition, there has been some speculation that interest rates may be cut below zero in both the UK and US. However, both Powell and Bailey stated that this was not something that was being considered for now. President Trump is in favour of negative rates and may continue to pressure FOMC Chair Powell.
Compounding Sterling concerns further were news reports surrounding lack of progress in trade talks between the UK and EU ahead of an important deadline with Sterling falling by over 2% versus the Euro on this news. On Friday, it was revealed that very little progress has been made with both sides calling on the other to change their approach. The end of June European Council deadline for organising an extension of the Brexit transition period draws closer, bringing another cliff edge into view. There are no further Brexit talks until June 01.
Looking to the week ahead, it’s a busy week for economic data from the UK with key economic data set for release from Tuesday to Friday.
- UK labour data
- FOMC Chair Powell speaks
The labour market report which covers the three months to March is expected to show only a relatively modest slowing in employment and rise in the unemployment rate. The UK’s Job Retention Scheme should prevent the unemployment rate rising by as much as seen in the US.
- UK inflation data
- FOMC minutes
The headline inflation data (CPI) is expected to drop to 0.8% (from 1.5% in March) due principally to lower utility and petrol prices. A fall below 1% will mean that the BoE Governor will have to write to the Chancellor of the Exchequer explaining why the inflation target has been missed and what he will be doing to push it back towards target. The minutes of the Federal Reserve’s April meeting will probably yield few surprises. However, it will be interesting to see whether there was discussion of a change in the Fed’s forward guidance and of further policy measures to be taken.
- UK PMI services and manufacturing
- US jobless claims
As these figures are representative of April it is likely to reflect a dovish number, however, with lockdown restriction being eased for May, the market is already looking to next month readings. In the meantime, the market will continue to focus on the US jobless claims to articulate the size of the problem.
- UK retail sales
- EZ PMI manufacturing and services
We’re expecting modest improvements in both the Eurozone manufacturing and services PMIs for May from extremely low levels in April. That will point to an easing in the pace of contraction as lockdown measures in some countries start to be lifted. In the meantime, the UK retail sales are expected to remain weak as they represent the figures for April, when the governments full lockdown measures were in place.