Last week brought the relieving news that the UK economy avoided another quarterly negative growth figure and therefore a dip back into technical recession. Not only this, the 0.3% showing was much better than 0.1% consensus forecasts. The dominant and usually reliable UK services sector drove this Q1 growth, while the manufacturing and construction sectors remained under pressure.
Growth in itself is positive for sterling, given the uncertainty surrounding the UK economy. However, sterling is also benefiting as the market prices out the expectation of more QE being announced at next Thursday’s MPC meeting. The Funding for Lending Scheme has been extended to January 2015 and greater emphasis has been placed on increasing lending to small businesses. This sort of monetary activism, combined with the GDP figure, will probably maintain a majority in favour of standing still on QE this month.
MPC member McCafferty reminded us yesterday that the UK faces a slow and difficult recovery but his cautiously optimistic tone is likely to be fairly typical among the committee. The week ahead brings the PMI figures for the month of April and we are expecting modest improvements within all three of the UK manufacturing, construction and services sectors, which should bolster the pound’s growing demand in the coming sessions.
ECB to cut interest rates this week
ECB interest rate policy is the key topic in the FX markets at present. Last week’s German data looks likely to be the straw that broke the camel’s back as far as an ECB rate cut is concerned. Germany insists it doesn’t need or want a rate cut but the ECB must be seen to take action in the face of the eurozone’s deepening recession. We believe the rate will be reduced from 0.75% to 0.50%.
Some market players seem to have used the ECB rate cut story as an excuse to buy the euro this week, on the positive implications it might have for eurozone growth. There is a chance this could be the response on Thursday but we are still siding with the probability that a rate cut will be negative for the single currency in the short and long term.
Any near-term dollar rebound relies on a firmer US jobs report
This Friday’s US non-farm employment change will be a key driver for the US dollar over the next few weeks. It will shed some light over whether the March jobs report was a temporary blip or the start of an extended period of labour market weakness. We are expecting Friday’s figure to bounce back, which could well lend the greenback some support.
We remain confident that the soft finish to Q1, as evidenced by last week’s lower than expected US GDP figure (2.5% q/q), will prove temporary and that the dollar will return to strength in Q2. On balance, we don’t actually expect any major changes on monetary policy front from the Fed tomorrow.
End of week forecast
|
GBP /
EUR
|
1.1950
|
|
GBP /
USD
|
1.55
|
|
EUR /
USD
|
1.2970
|
|
GBP /
AUD
|
1.50
|
Having recently posted three-month highs of €1.19, GBP/EUR is trading half a cent lower this afternoon. The outlook remains positive in light of the improved UK economic picture and we expect a climb back above €1.20 in the weeks ahead. Sterling’s rally against the greenback may have a little further to go from the current $1.55 level, though we do expect it to top out soon. Looking at the big picture, the current price represents a decent level at which to buy USD.
