Just two weeks ago an interest rate hike in the UK looked certain. Polls previously showed a 90% chance of a hike whereas now they are only showing a 25% chance. The reason for this being the recent bad inflation figures and GDP only expanding by just 0.1% quarter on quarter. The pound has seen its biggest move down against the dollar since the referendum, falling 7 cents. GBP/EUR has fallen nearly 2% off the back of this news and is still struggling to bounce back against both currencies.
Apart from this, there hasn’t been much to talk about as no significant data has been released this week. All eyes will, however, be on next Thursday’s super heavyweight day from the UK. The Bank of England’s interest rate decision along with Carney speaking and production data. As the hike isn’t expected, if they do decide to hike the rates or indicate towards a hike, we could see sterling strengthen.
The euro has continued to fall against the dollar but has held against the pound. EUR/USD is now at it’s lowest level since January this year. The main reason for this was due to Draghi failing to provide any change to the central banks forward guidance. The bank’s monetary policy statement was left unaltered and identical to that of the previous meeting at the beginning of March.
The flash PMI of business activity for April also showed no significant change from the previous month. A slightly underwhelming set of macroeconomic data out on Monday suggested that conditions could be worsening in the Eurozone. German inflation figures came in unchanged at 1.6% for April. The Italian headline however, indicated that inflation slowed sharply to just 0.5% versus the 0.7% consensus, its joint slowest pace in fourteen months.
The US economy is powering ahead in 2018 and most other major economies appear to be stalling. Investors are refocusing on the widening in interest rate differentials between the US and every other country. The US continue to post positive data overall but on Wednesday, at the Fed’s interest rate decision, they kept the rates as they were. They did however express confidence that a recent rise in inflation to near the US central bank’s target would be sustained, leaving it on track to raise borrowing costs in June. The USD has gained real ground against the euro and the pound, moving down 3-5% over the past few weeks. The US posted Nonfarm Payrolls and Average Earnings data today – these both failed to beat expectations but didn’t cause any real movement.