27 April 2026: Breeden’s warning echoes through the City

The Bank of England Deputy Governor for Financial Stability became the first G7 central banker to “raise their head above the parapet” last week, telling reporters that global stock markets do not currently reflect the risks investors face.

Her comments have reverberated across markets, not just in the UK but around the developed world, as Central Banks prepare to meet this week to discuss monetary policy.

The Bank of England, the ECB and the Federal Reserve all face similar dilemmas but are likely to adopt different approaches to the issues created by the US/Israeli attacks on Iran.

The rate of increase in energy prices has eased, but supply chains for other goods have been severely disrupted, which will further increase inflation as demand outstrips supply. However, the war will also affect growth in the G7, so Central Banks will want more information before committing to higher rates.

The next meeting of the Monetary Policy Committee, which takes place on Thursday, is widely expected to leave rates unchanged, with markets pricing in only a very small chance of a move.

“Retail sales figures were better than expected in March, following a disappointing February, although they were lifted considerably by fuel sales. The start of the Easter holidays boosted sales volumes, particularly for clothing and footwear retailers, as consumers looked to update their spring wardrobes. On the other hand, food stores were the only category to see a drop in volumes, as consumers continue to buy less to manage the cost of their shopping at the till.

“The first quarter of the year saw consumer confidence face its largest drop in four years, as geopolitical tensions added further uncertainty for consumers already feeling the pinch of the cost of living. While it’s reassuring to see sales volumes improve in March, continued growth will depend on the resilience of consumer budgets amid rising inflation.

This should also further emphasise retailers’ need to cater to value-driven consumers, those looking for quality products at the best price point.”

The pound closed higher for the fourth consecutive week, driven by the market’s concerns about the US economy and the performance of the US administration. It reached a high of 1.3544 and closed at 1.3533.

The markets will begin to turn their attention to the possible fallout from the elections, which take place a week from Thursday across the devolved assemblies, local councils and some municipal authorities. These elections will truly mark the end of the two-party system in the UK, with Reform UK and the Green Party expected to make substantial gains.

The Prime Minister appears to have, for now, survived the questions over his appointment of Lord Mandelson as UK Ambassador to Washington. However, there are still some hurdles facing him before the likely onslaught from the local elections.

The Federal Reserve is also likely to keep interest rates unchanged at its upcoming meeting, a move analysts attribute to the prevailing economic and geopolitical climate. Rates currently stand between 3.50% and 3.75% and are expected to remain within this range.

The primary driver is the ongoing conflict in the Middle East, which has disrupted global oil supplies. Rising fuel and energy costs have pushed up production, transport, and consumer goods prices in the US, further pressuring inflation.

US inflation has reached 3.3%, the highest level in nearly two years. The Federal Reserve's core mandate is to maintain price stability and balance the labour market. However, achieving this balance is increasingly difficult, as the need for tight monetary policy to curb inflation conflicts with the pressure to avoid hindering economic growth and employment.

Experts note that beyond the energy crisis, supply chain disruptions are keeping inflation persistently high. This has increased the likelihood of reduced consumer spending and added cost pressures on businesses, making an immediate rate cut by the Fed unlikely.

Fed officials are adopting a 'wait and see' approach as the full impact of the war remains unclear. Some policymakers have warned of rising long-term inflation risks, further dampening the prospects for future rate cuts.

Furthermore, the Fed's decision comes amid political pressure. US President Donald Trump has consistently pushed for lower interest rates, sparking debates over the Fed's independence and potential leadership changes. Consequently, the upcoming meeting is significant from both an economic and political perspective.

Given the energy crisis, high inflation, labour market uncertainty, and political pressure, the Federal Reserve is most likely to keep interest rates steady for now, while the future trajectory remains uncertain.

Meanwhile, the President survived another botched attempt on his life over the weekend. It is interesting to note that there have been three incidents involving firearms around President Trump during his second term in office, and following each one, there has been speculation over whether they were “inside jobs”.

Be that as it may, the speculation reflects poorly on the regard in which the U.S. President is currently held.

Consumer sentiment fell 3.5 index points this month, now comparable to the trough seen in June 2022. Declines were observed across political party, income, age, and education.

Expected business conditions declined across both short and long time horizons, nearly matching year-ago readings when the reciprocal tariff regime was implemented.

After the two-week cease-fire was announced and gas prices softened slightly, sentiment recovered a modest share of its early-month losses. The Iran conflict appears to influence consumer views primarily through shocks to gasoline prices and potentially other prices. In contrast, military and diplomatic developments that do not lift supply constraints or lower energy prices are unlikely to buoy consumers.

US Attorney for the District of Columbia Jeanine Pirro said on Twitter that her office was ending its probe into the Fed’s extensive building renovations because the Fed’s inspector general would scrutinise them instead.

The move could lead to a swift Senate confirmation vote for Warsh, a former top Fed official whom President Donald Trump nominated in January to replace Powell. Powell's term as chair ends on May 15.

Senator Thom Tillis, a North Carolina Republican, had said he would oppose Warsh until the investigation was resolved, effectively blocking his confirmation.

Republicans praised Warsh during a hearing earlier this week, even as Democrats questioned his independence from Trump, the lack of transparency around some of his financial holdings, and what they said was his flip-flopping on interest rates.

The dollar index continued to fall last week, though it could not yet be termed a slump. It fell to a low of 98.01 but recovered to close at 98.53.

Business activity across the Eurozone unexpectedly declined in April for the first time since late 2024, as a sharp contraction in the services sector outweighed continued stability in manufacturing, according to survey findings released last week.

The HCOB Flash Eurozone Composite Purchasing Managers’ Index, produced by S&P Global, fell to 48.6 in April from 50.7 in March. This pushed the index below the 50-point mark that separates expansion from contraction and came in below market forecasts of 50.1.

The figures suggest mounting strain on the region’s economy, with rising energy prices and supply chain disruptions linked to the Middle East conflict reducing demand and weakening business confidence.

S&P Global reported that the downturn was driven primarily by the services industry, while manufacturing remained comparatively steady in several of the euro area’s largest economies.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said the Eurozone is facing growing economic pressure linked to the ongoing conflict. He also cautioned that supply shortages are becoming more widespread, which could further limit growth and add upward pressure on prices in the near term.

The weaker-than-expected survey results are likely to deepen concerns at the European Central Bank, which is already grappling with inflation above its 2% target. Although policymakers are likely to keep interest rates unchanged at their upcoming meeting, financial markets are anticipating two rate increases by the end of the year.

The more vocal members of the ECB’s Governing Council all agree that they will need to see more evidence before they vote to increase interest rates, despite the rise in inflation.

Isabel Schnable told reporters recently that the ECB finds itself in a more favourable position than it was following the COVID pandemic, and she would like to understand whether the current rise in inflation can be solely attributed to the war in Iran and whether its effect on the Eurozone economy could warrant a tightening of monetary policy.

ECB President Christine Lagarde spoke along similar lines, calling for vigilance and a heightened readiness to act.

The Euro had a mixed week, with markets showing both concerns about the U.S. economy and little faith in the Eurozone’s ability to grow as close to expectations as hoped. This view was confirmed by the Bundesbank, which slashed its growth forecast for Germany, the region’s main growth engine.

The single currency fell to a low of 1.1669 but rallied to close at 1.1722.

Have a great day!