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The UK and EU will meet this week in what the Prime Minster hopes will represent a trade reset.
Last week’s febrile currency trading saw the pound and euro range by more than two cents against the US dollar. For sterling, the week was dominated by some welcome news on the growth front, caveated by the suspicion that economic activity is likely to slow as we progress through the year.
The week ahead is no less significant. Today sees the start of a landmark summit between the British government and its European counterparts, in what Sir Keir Starmer hopes will mark a post-Brexit trade reset. Meanwhile, Wednesday’s inflation report is predicted to show a big spike in the headline number, which could spell more volatility for the pound.
While a full UK-EU trade revolution is unlikely to take place, officials hope that this week will set the stage for closer collaboration on defence and economic matters. A handful of niggling disagreements – notably around fishing and youth mobility – are thought to be preventing further progress.
Consumer confidence in the United States came in well short of expectations in the University of Michigan study. May’s edition showed another decline in the overall score – now down to its lowest level in almost three years – as participants reported heightened inflation expectations.
Another intervention from US President Donald Trump on the subject of trade failed to cut through the data to end Friday. Given the sheer number of nations it was negotiating with, Trump suggested around 150 countries might face higher tariffs. Trump indicated his team would instead send letters outlining the cost of doing business with the United States.
Alongside the key events outlined at the top of this note, sterling also faces the small matter of retail sales data and S&P’s manufacturing PMI study.
The eurozone’s key events both concern Germany in the form of manufacturing data and the Ifo business climate survey.
As for the United States, ongoing negotiations over tariffs will likely fill the void of a relatively quiet week on the macro front.
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GBP: Braced for big inflation bump
With April heralding the start of the new financial year, economists expect a big round of price rises to send the UK’s headline inflation rate north of 3%. A miss on that read would set markets scrambling to adjust their interest rate expectations, never a good omen for currency stability.
GBP/USD: the past year
EUR: A new post-Brexit era?
You wouldn’t have thought it possible during the height of the fractious Brexit negotiations, but strange forces have coalesced to push the UK and eurozone back together. This week’s negotiations could have sizeable implications for currencies, too, and the euro will likely be sensitive to any major announcements.
GBP/EUR: the past year
USD: Data and Fed urge caution
Based on last week’s late glut of data, as well as Federal Reserve Chair Jerome Powell’s hawkish comments, the threat of inflation is very real in the US economy. That helped explain the US dollar’s strong Friday performance, but markets are forced to carry on their balancing act between structural dollar weaknesses and the possibility of higher interest rates.
EUR/USD: the past year
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