The week ahead:
- UK employment market data (Tuesday, 7:00am)
- UK inflation figures (Wednesday, 7:00am)
- UK services and manufacturing purchasing managers’ survey data (Thursday, 9:30am)
Highlights from last week:
- UK economy shrinks at fastest rate since the financial crisis
- US inflation level drops sharply in April
- Reserve Bank of New Zealand increases its stimulus measures
The week ahead: Busy data week to reveal economic impact of pandemic
Efforts to contain the coronavirus pandemic and wider investor sentiment across financial markets continue to provide the key focus for global currency markets. The domestic economic calendar is also busy this week and will provide important insights into how economic conditions are responding. Releases include UK labour market statistics (Tuesday, 7:00am), inflation data (Wednesday, 7:00am) and retail sales figures (Friday, 7:00am). May’s preliminary purchasing managers’ survey data will offer gauges of activity in the UK services and manufacturing sectors against the backdrop of ongoing lockdown measures (Thursday, 9:30am).
Euro zone inflation data (Wednesday, 10:00am) will be watched for any signs that inflationary pressures are weakening from their already subdued levels. With much of the focus on how measures to slow the spread of coronavirus are restricting economic activity, May’s preliminary euro zone purchasing managers’ survey data (Friday, 9:00am) will highlight how the services and manufacturing sectors are currently faring.
Having kept US interest rates at near zero, the minutes of the Federal Reserve’s April policy meeting will give additional insights into policymakers’ views as they attempt to support the US economy through the crisis. Initial jobless claims have surged as the pandemic took hold and the latest figures (Thursday, 1:30pm) will offer further insight into how US labour market trends are developing. Purchasing managers’ US services and manufacturing sector readings will also be under the spotlight on Thursday (2:45pm).
Last week recap – UK economy shrinks in first quarter, worse likely to come
A first estimate of UK Gross Domestic Product (GDP) suggested the economy contracted by 2.0% in the first quarter, the sharpest rate of decline since the financial crisis. Economic activity plunged by 5.8% in March compared to the month before. Whilst these economic figures were actually better than feared, the impact will show up more dramatically in the second quarter data as the UK’s lockdown measures were only introduced in late March. The Bank of England recently forecast an unprecedented 25% quarter-on-quarter decline in GDP in the second quarter.
The euro zone’s first quarter economic contraction was sharper than the UK’s, with the bloc’s GDP shrinking by 3.8% during the three months. This was the fastest quarterly drop on record and followed on from weak growth in the final quarter of 2019 when the economy grew by just 0.1%.
Sterling came under renewed pressure from the outset last week, slipping to its lowest level against the euro for almost three weeks on Tuesday. This coincided with ongoing confusion over the UK government’s conditional plans to ease lockdown restrictions over the coming months. Brexit concerns also weighed on the currency, with the government repeating its stance that the transition period will not be extended beyond December and showing few signs that it will be prepared to compromise in trade negotiations with the EU.
At midday on Friday, a telephone conversion of £20,000 into euros via our Currency Service would have purchased €22,374.
US inflation drops sharply in April as economic prospects appear bleak
The annual US inflation rate slowed to just 0.3% in April. This was a monthly drop of 0.8% which was the steepest fall since the 2008-9 financial crisis. Lower gasoline prices were a big contributing factor. The inflation rate is a considerable distance under the US Federal Reserve’s 2% inflation objective and may fall further in the coming months. Subdued inflation levels should give the central bank some room for manoeuvre with its stimulus measures as it tries to shelter the US economy from the havoc wrought by the pandemic.
Federal Reserve Chair Jerome Powell cautioned on Wednesday that the US economy may endure weak growth for “an extended period”. He ruled out implementing negative interest rates for the time being despite the sombre assessment of the economy’s prospects. The sterling/US dollar exchange rate fell to its lowest level in more than a month as demand for perceived safe-haven assets and currencies boosted the dollar.
At midday on Friday, a telephone conversion of £20,000 into US dollars via our Currency Service would have purchased US$24.188.
New Zealand central bank boosts stimulus measures to support economy
The Reserve Bank of New Zealand (RBNZ) kept interest rates unchanged at 0.25% as expected last week, but indicated that negative rates would become an option in the future. The central bank almost doubled the size of its quantitative easing measures to $60 billion as it tries to mitigate the economic impact of coronavirus, which it said will include lower economic growth and employment. The RBNZ noted that even if New Zealand can contain the spread of the infection locally, reduced global activity would dampen demand for the country’s exports.
At midday on Friday, a telephone conversion of £20,000 into New Zealand dollars via our Currency Service would have purchased NZD$40,510.