UK economic slowdown hits Sterling

UK Rate hike off the table?

Hawkish members of the MPC will still vote for a hike in interest rates at next week’s Bank of England meeting despite the lowest reading for economic growth in six years. They will cite various extraordinary circumstances like the unseasonal weather brought about by the “beast from the east” but the reality is the UK economy is slowing to such a degree that a rate hike at this point could tip the country into recession.

Over the past month, since interest rate futures were predicting an 80% chance of a hike, data has been uniformly weak, rumours are circulating about both internal disagreements within the Government over Brexit and in Brussels over the UK’s proposals for the future relationship.

The pound reached a low of 1.3747 on Friday and faces further pressure from a resurgent dollar this week. Versus the single currency the pound retraced all last week’s gains making a low of 1.1358.

Overnight the resignation of the Home Secretary has plunged the Government into a further crisis as one of Theresa May’s most vocal supporters has left the Cabinet. The immediate effect on the currency will be minimal but any disruption in the current environment add the pressure on Mrs. May and detracts from the Government’s ability to Govern effectively.

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Employment report to be pivotal for dollar.

This week will be pivotal for the dollar which has paused in its recent surge higher as long-term interest rates appear to have peaked for now. The dollar index approached its 2018 high on Friday reaching 91.99 before falling back as the yield on ten-year Government bonds appeared to top out. The yield reached 3.035 before falling back below the significant 3% level closing the week at a little over 2.95%.

This has been a major factor in the dollar’s recent rally and now all eyes will turn to the employment report which is due for release this Friday. The headline new jobs created is expected to reach close to 200k with a significant revision of last month’s surprisingly weak number of 103k. The major interest, however, will be in the hourly earnings data that is expected to have risen by close to 3%.

This will put pressure on the FOMC to hike rates at its June meeting although with two reports to study prior to the meeting, Chairman Powell will have plenty of time to consider his options.

Other data releases this week include core consumption which is expected to have risen to 1.9%. The FOMC also meets but there is zero expectation of a rate hike although the market will consider Powell’s comments for any change in tone or rhetoric which could signify a change of emphasis.

Euro faces data driven week

This week will see plenty of data releases from the Eurozone although the tone of the most recent press conference from ECB President Mario Draghi means that it would take a seismic shift away from recent releases to create a change in monetary policy. Market expectations are for a continuation of recent results which have been on the weaker side.

Today’s release of German inflation data is expected to be unchanged at 1.5% as the region’s industrial powerhouse continues to cope well with low interest rates despite the Bundesbank’s continued call for a pre-emptive hike to ward off future price increases.

Following tomorrow’s May Day celebrations, Wednesday sees the release of Q1 GDP data for the entire region. It is expected to show that the economy grew by 0.5% In the three months to March, a little lower that Q4 ‘17’s 0.6% and this will contribute to a year on year figure of 2.6%.

This is unlikely to have a significant effect on the Euro which closed at 1.2130 on Friday having recovered from a low of 1.2054.

The single currency is in reactive mode being a proxy for the recent strength of the dollar and is expected to continue in this vein for some time to come.