Sterling is under pressure this morning following a raft of news and developments. Starting with comments from Governor Bailey. He stated that the bank is treading a very tight line between taming inflation and heaping greater woe on the economy. According to Bailey, developments in the labour market will be crucial and whether there would be an easing of very tight conditions. Economic data this morning compounded this view as consumer confidence dipped sharply in April with the second-lowest reading on record and retail sales declined 1.4% for March compared with expectations of a 0.3% decline. Despite this, a hike is still expected in May.
In the meantime, the political backdrop added to the uncertainty as MPs approved the Privileges Committee launching an inquiry. Boris Johnson will be investigated by a Commons committee over claims he misled Parliament about parties in Downing Street during lockdown once the police have finished their own investigation into the gatherings. This has increased the odds of him leaving office in 2022 from 33.7% on 20/4 to 42.4% overnight according to Smarkets.
Looking to the day ahead, the docket is dominated by April manufacturing and services PMI updates. Last month saw a big jump in the UK services measure as the post-Omicron rebound. This month’s data will be watched for evidence on how much the Ukrainian crisis and inflationary pressures are impacting the UK.
Policy remains data dependent
Yesterday, in line with both the Bank of England (BoE) Gov Bailey and FOMC Chair Powell, European Central Bank (ECB) President Lagarde was also speaking. Lagarde stated that policy will depend on incoming data and that it was vital to maintain operational flexibility which had little impact. Economic data was better than expected as the Euro-zone consumer confidence index improved to -16.9 for April from -18.7 previously. However, confidence in the outlook remained fragile while Ukraine fears also sapped potential support.
Looking to the day ahead, April manufacturing and services PMIs will also be out for the Eurozone. The Eurozone manufacturing PMI measure fell in March, but the services index rose very modestly. Given the Eurozone’s closer economic links to Russia and Ukraine (relative to the UK or the US) it seems likely to be more impacted by the crisis
Over the weekend we have the conclusion of the French Elections.
Dollar surges on Hawkish comments
The US Dollar continued to move higher on Thursday after Federal Reserve Chair Jerome Powell reminded markets of the Feds hawkish rhetoric to tame inflations. Investors are now pricing in three 50-basis point hikes at the Federal Open Market Committee (FOMC) meetings in May, June and July. Powell added that further 50-basis point hikes could take place, however that this would be considered meeting by meeting. Following Powell’s comments, the market reaction saw global yields to rise on Thursday and caused markets to turn risk-averse ahead of the weekend. Elsewhere, Wall Street’s main indexes closed deep in the red on Thursday and the Dollar index continued to advance, trading near a two-year high level of 101.00.
Looking ahead to today, April manufacturing and services PMIs will also be released for the Eurozone and the US and will provide fresh updates on inflationary pressures and supply chain issues.
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