Will UK Employment Data Come in Better Than Expected?
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Will the lighter calendar offer relief for the pound?
The pound weakened last week on expectations that the BoE could cut the interest rate before the European Central Bank (ECB). However, the euro’s three-day winning streak came to an end during the early European session on Friday, after the release of the positive UK Gross Domestic Product (GDP) for Q1.
The UK economy has come out of recession according to the UK’s Office for National Statistics (ONS). The UK’s GDP increased by 0.6% QoQ in the first three months of the year and returned to growth after a mild recession in the second half of 2023. The figure surprised the market which expected a 0.4% expansion in the first quarter. The UK GDP grew at an annual pace of 0.2% YoY in Q1 of 2024 up from a 0.2% contraction in Q4 of 2023, and above the estimate of 0% growth.
On Thursday, the Bank of England (BoE) kept its rates on hold at 5.25% for the sixth consecutive meeting but left the door open for an earlier rate cut, as, during the press conference, BoE Governor Andrew Bailey noted that “a rate cut next month was a possibility.” BoE Chief Economist Huw Pill said that the UK central bank was confident that they would start the easing the cycle in the next few meetings, but more data was necessary to assess the course of inflation and wage growth.
On the Eurozone front, the European Central Bank (ECB) Vice President Luis de Guindos clarified that the ECB’s plans beyond the June rate cut were not certain yet. On the other hand, ECB Council member Robert Holzmann noted that the oil price shock can put off the interest rate cut from starting in June. The ECB’s more hawkish tone in comparison to the BoE may provide support to the euro and weigh on the GBP/EUR in the near term.
In terms of economic data, we note the following: On Tuesday, we note Germany’s final HICP rate for April, the UK’s ILO Unemployment rate, March’s average weekly earnings and employment change figure and April’s HMRC Payrolls figure. Additionally, we note the Eurozone’s current economic sentiment figure and Germany’s ZEW economic sentiment and current conditions figures for May. On Wednesday, we get France’s final HICP rate for April, the Eurozone’s Preliminary GDP rates for Q1 and Industrial production rate for March. Finally, on Friday, we get the Eurozone’s final HICP rate for April.
Expected Volatility – Medium
UK labour market data for the three months ending March will be closely watched. If the data shows that the employment market is resilient, the pound will gain support. On the contrary, if it shows that the labour market has eased, then the pound could weaken as this will put more pressure on the BoE to cut rates earlier than expected.
US CPI rates to provide direction for the major pair
The US dollar (USD) exhibited its strength against its rivals last week as Federal Reserve (Fed) policymakers were confident about the US strong economic outlook while expressing uncertainty that inflation will drop to the desired rate of 2%. On Friday, however, the pound moved higher following upbeat UK Q1 GDP and March factory data. The easing US labour market conditions have also weighed on the US dollar.
The strong UK GDP growth will allow the BoE to achieve a ‘soft landing’ (achieving stability without recession) of the economy. In the press conference, after the monetary policy on Thursday, BoE Governor Andrew Bailey commented that the central bank was confident that inflation will return to target in the coming months.
Apart from the upbeat Q1 GDP data, the UK ONS showed that monthly Industrial Production increased by 0.2% in March against the anticipated 0.5% drop. Annually, the Industrial Production increased at a higher pace of 0.5% from the 0.3% consensus. Monthly Manufacturing Production rose by 0.3% as the forecast was a contraction of 0.4%. Annually, this indicator grew at a stronger pace of 2.3% against the 1.8% expected increase.
The US dollar was under pressure as higher-than-expected individuals claimed jobless benefits for the week ending 3 May, with growing concerns about the US labour market’s strength. The US Department of Labour reported that Initial Jobless Claims were the highest since the 10 November week, with 231K against the expectation of 210K and the 209K reported previously.
In terms of US economic data, we note the following: On Tuesday, we have the PPI Machine manufacturing figure for April. On Wednesday, we get CPI rates for April and retail sales rate for April. On Thursday, we draw attention to the weekly initial jobless claims figure, the US Philly Fed Business index for April and the US Industrial production rate for April.
Expected Volatility – Medium
Investors will focus on Wednesday’s release of the US Consumer Price Index (CPI) data for April.
All eyes on the Eurozone preliminary GDP rate for Q1
The EUR/USD remained supported as Fed rate-cut speculations have weighed on the greenback. The easing employment market conditions have increased Fed rate-cut prospects. On the other hand, the ECB is anticipated to deliver three rate cuts this year as inflation has cooled off.
The major currency pair was strong on Friday as investors have already discounted the fact that the European Central Bank (ECB) will start reducing its borrowing rates in June. While a June rate cut appears certain, ECB policymakers are split about extending the rate-cut cycle after the June meeting. Some policymakers believe that further interest rate cuts from the July meeting could increase price pressures.
On the one hand, ECB policymaker and Bank of Greece Governor Yannis Stournaras told Greek media last week that he expects three rate cuts this year. On the other hand, ECB Governing Council member and Governor of Austria’s central bank, Robert Holzmann, said on Wednesday that there is no reason to cut rates “too quickly or too strongly.”
Expected Volatility – Medium
Last week, market sentiment was the main driver for the pair. For next week, the focus will fall on the US Consumer Price Index (CPI) data for April, which will be published on Wednesday. On the euro front, we note the Eurozone’s preliminary GDP rate. If the rates come in lower than expected, suggesting a potential slowdown in economic growth, the euro could weaken.
Japanese Yen (JPY)
The Japanese Yen (JPY) closed the week weaker against major currencies like the USD, GBP, and EUR. The increased uncertainty among financial market players about a government intervention in support of the JPY as well as doubts about the effectiveness of the Bank of Japan (BoJ)’s current monetary policy have weighed on the yen. BoJ Governor Ueda commented on the possibility of raising interest rates earlier if inflation rises, but investors are not convinced. Thursday’s upcoming release of Q1 GDP rates could affect the BoJ’s monetary policy and could boost the yen if economic growth is higher than expected. Nevertheless, unless the BoJ provides clearer guidance, the yen may weaken further. On Tuesday, we get Japan’s Corporate Goods Prices rate, and, on Wednesday, Japan’s Machinery orders rate for March and Chain store sales rate for April.
Australian Dollar (AUD)
The Australian dollar (AUD) is extremely susceptible to changes in market sentiment with a more risk-oriented approach to provide support, and vice versa. The close economic ties with China also influence the AUD, with China’s better-than-expected trade data for April pushing up the AUD. The higher import growth implies higher exports of Australian raw materials. Yet, geopolitical tensions between the US and China due to the introduction of tariffs on Chinese goods may weigh on market sentiment and weaken the Aussie.
On the monetary front, the Reserve Bank of Australia (RBA) kept interest rates unchanged in its latest decision, signalling economic uncertainty and inflation risks. The AUD dropped despite a seemingly hawkish tone in the bank’s statement. RBA Governor Bullock’s statement that the current interest rate is sufficient for achieving inflation targets might indicate that monetary policy will be easy, which will contribute to the Australian dollar’s weakness.
Concerning the macroeconomic picture, Australia’s first-quarter retail trade growth rate dropped below the forecasts, implying weaker consumer buying power. On the other hand, the data was overshadowed by China’s trade data, which showed an increase in imports. On Thursday, the release of the Australian Employment figures for April, could increase volatility for the AUD, with strong data offering support to the currency and the RBA’s current stance on monetary policy. On Friday, we note China’s retail sales and urban investment rates for the month of April.
Canadian Dollar (CAD)
At the macroeconomic level, Canada’s Ivey PMI figures for April demonstrated a surge in manufacturing activities that gave a certain boost to the CAD. Nevertheless, the effect may be temporary as April’s employment data, to be released later on Friday, can be negative for the CAD if it indicates that the easing in the labour market continued in March.
BoC Governor Macklem’s comment pointed out that government spending was not helpful in managing inflationary pressures, with more spending to move the central bank towards a more hawkish policy stance which could support the Loonie. On Wednesday, we get Canada’s Manufacturing sales rate for March.