Sterling dropped to a fresh 21-month low against the US Dollar amidst the risk off sentiment in the market. There were no data releases during the day and there was a significant element of caution ahead of next week’s Bank of England (BoE) policy meeting. Given the economic backdrop, it is expected that the BoE may downgrade its growth forecasts and raise inflation forecasts.
Overnight the Lloyds Bank Business Barometer survey reported a partial recovery in their trading prospects in April but optimism for the wider economy declined for a second successive month. That left overall business confidence steady at 33%, the lowest since last summer.
The key focus for the market will be the BoE meeting next Thursday. Given the mixed views from analyst and rhetoric the market will be looking for some clear signposting on the direction of monetary policy.
US economy contracts for the first time in 2-years
Yesterday’s trading saw market sentiment improve as China’s Covid-19 outbreak seemingly came under some control. Early in yesterday’s session the US Dollar Index tested the 104.00 level for the first time since December 2002 as the Greenback continued to advance against a weaker Euro. In US data releases, initial jobless claims helped to support the Dollar as the number of Americas filing for new unemployment benefits remained historically low.
Meanwhile, US Gross Domestic Product (GDP) for the first quarter showed a contraction of 1.4% on an annualised basis, the first contraction in nearly two years. Despite the lower-than-expected reading, it’s unlikely to deter the Federal Reserve from hiking interest next week as it attempts to tackle higher inflation.
Today, investors will focus on the release of US Core Personal Consumption Expenditure which is widely considered as the FED’s preferred measure of inflation. The monthly Core PCE is expected at 0.3%, slightly lower than the previous reading of 0.4%. The annual figure is expected at 5.3%, down from the previous 5.4%.
Ukraine concerns weigh on single currency
The single currency continues to remain under pressure, post a fresh 5 year low against the US Dollar. Concerns surrounding Ukraine developments, especially with on-going aggressive rhetoric from Russian officials while US President Biden asked Congress for another huge support package.
German consumer prices increased 0.8% for April with the year-on-year increases at 7.4% from 7.3% the previous month which was above consensus forecasts of 7.2% and the highest rate since March 1974 which will maintain Bundesbank demands for a tighter monetary policy.
Looking to the day ahead, the Eurozone Q1 GDP to increase by 0.3%, the same rate of expansion as in Q4 but lower than had been forecast at the start of the year whilst the region’s inflation reading is expected to push to 7.5%.
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