Update: The European Central Bank’s (ECB) Chief Economist Peter Praet has commented today that, while the stipulation that strong inflation is required for monetary tightening will not change, other aspects of the ECB’s policy guidance could evolve over time. However, he did note that wage growth – which will be vital in pushing inflation up to the ECB’s target range – may not strengthen until a ‘relatively late stage in the economic expansion’.
This firms the belief that the Governing Council will drop an observation that risks to the economy are tilted to the downside in its next monetary policy meeting.
There is no UK data set for release today, but the Pound is currently trending up against both the Euro and US Dollar. Early results from the local council elections indicate a strong swing in support towards the Conservatives, which helps firm market belief that the upcoming general election will give Theresa May a much stronger majority in Parliament.
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The Pound Euro exchange rate has fallen below opening levels to 1.17, while the Pound US Dollar exchange rate has gained to 1.28, after the latest UK service PMI unexpectedly rose.
Economists had predicted the services index would weaken from 55 to 54.5, but it instead accelerated to 55.8.
This pushed the composite, also expected to weaken to 54.5, up to 56, which indicates the economy may have grown 0.6% in April; double the pace seen in the first quarter.
Chris Williamson, IHS Markit Chief Business Economist, comments;
‘While we expect consumer spending to slacken in coming months, with the April survey highlighting continued weakness in sectors such as hotels, restaurants and other household-facing businesses, there’s good reason to believe that at least 0.4% GDP growth can be achieved in the second quarter as a whole.’
UBS Wealth Management Economist Dean Turner has some reservations, however, observing that ‘although the services PMI beat expectations, some of the details give pause for thought. Input costs continue to point to higher inflation in the months ahead, a factor that is likely to weigh on consumers. Furthermore, although firms’ optimism about the year ahead is still positive, it fell for the third consecutive month.’
Turner also notes an ‘interesting nuance’ in UK ecostats at the moment, which is that so-called ‘soft data’ like the PMIs, which are surveys of business opinion, ‘signal a greater sense of growth’ than figures like GDP, which are classed as ‘hard data’.
The fact that companies in the service sector are increasing their prices at the fastest rate since the middle of 2008, in order to cope with sharply-rising costs, is holding the Pound back from making more solid gains on the trifecta of solid PMIs this week.
The Euro has managed to resist the Pound’s advance thanks to improved confidence in the outcome of the French Presidential Elections.
Candidates Emmanuel Macron and Marine Le Pen took part in a televised debate last night and the Euro has received a boost after a poll revealed 63% of viewers found Macron the more convincing of the two.
This is in line with previous polls conducted before the first round of voting that had suggested in a then-hypothetical Macron/Le Pen face-off the former would claim 62% of the votes.
Macron’s popularity has edged lower since he made it through to the final round of voting, which takes place this Sunday, with his lead over Le Pen falling by nearly three points.
Regardless, this still leaves Le Pen 19.6 points behind her rival and, while analysts are cautious not to become overconfident – which led to serious embarrassment after the Brexit referendum and election of US President Donald Trump – many are claiming this is an insurmountable difference.
Meanwhile, the US Dollar is experiencing a sell-off after the Federal Reserve last night left interest rates on hold and kept the door open to a rate hike at the next policy meeting.
‘There is nothing in [the latest statement] to change our view of two more rate hikes this year,’ commented Fitch Ratings Chief Economist Brian Coulton.
Odds on a 0.25% hike in June have now risen to 73.8%, but after a quick appreciation the US Dollar is now falling again and is down -0.2% against Pound Sterling and -0.4% against the Euro.
The advancing EUR exchange rates are also sapping demand for USD.
There is no UK data left for release before the weekend, but high-profile developments from the Eurozone and the US are likely to keep GBP EUR and GBP USD pairings volatile.
European Central Bank (ECB) President Mario Draghi will tonight give a speech in Switzerland and tomorrow US non-farm payrolls and unemployment data will be accompanied by a slew of speeches from Federal Reserve officials, including Stanley Fischer, John Williams, Charles Evans and Fed Chair Janet Yellen.