GBP

A large upside surprise in the April retail sales number out of the UK comes on the back of the previous week’s inflation shock, and solidifies the sense that the Bank of England will be in no hurry to cut rates any time soon. Thus far, consumers in Britain appear remarkably resilient to a myriad of downside risks, notably the tariff uncertainty, the recent hike to business tax rates and higher household bills. We think that this resilience is unlikely to last, however, which could act to limit upside in sterling in the near-term.

Yet, the outlook for the pound still appears favourable in the medium-term. Together with the US, the UK has the highest interest rates in the G10, which should be a significant positive for sterling in the coming months. The trade outlook is also relatively good after Britain reached a deal with the US, while the government’s push for closer ties with Europe is continuing to lead to a thawing in commercial relations with the EU. In our view, sterling is perhaps the G10 currency with the most potential for appreciation.

EUR

The European Central Bank should cut rates by 25 basis points at its June meeting on Thursday, but this is completely priced in by the market and should have little impact on the euro. More important will be the communications from the Council and the updated economic projections, notably the size of any revisions to the inflation view. In particular, we are eager to know its interpretation of the recent mixed data, where surveys continue to paint a dire picture, but actual data seems to hold up better.

The May inflation data will be released just two days before the meeting. Markets are expecting the upward surprise from April to be fully unwound, and expectations for cuts beyond this week rest upon this assumption. This data point thus takes on additional importance, perhaps even more so than the ECB meeting itself.

USD

A sense of calm returned to the US bond market last week, which helped stabilise the dollar. Nevertheless, the old correlation between higher US yields and a stronger dollar has been flipped, which is a worrisome development for the greenback. The first signs of a labour market deterioration have appeared in the form of modestly higher weekly jobless claims, which have ticked up to around their highest levels since October. We are not at panic stations just yet, however, and futures markets are reluctant to price in another rate cut from the Federal Reserve until at least September.

Last week’s revised first-quarter GDP data (upped to show a 0.2% annualised contraction from 0.3%), also showed a slowdown in US consumption, which continued into April according to the latest PCE report. Expectations for this week’s data are for a modest slowdown, with Friday’s jobs report seen yielding a drop in job creation to the 130k level. Yet, this is unlikely to encourage the Federal Reserve to cut rates any time soon.