The UK energy market has finally delivered on the big hikes from the regulators’ price cap revisions, the commodity markets appear to be stabilising, albeit with prices materially higher than where they were this time last year, and there are further signs of a pick-up in consumer borrowing. On the face of it, last week’s data and surveys weren’t an indication of problems to come. However, dig a little deeper and you’ll find that the figures weren’t as good as they first suggest. Unsecured lending was rising because consumers were paying less off their credit cards, the rise in house prices, recorded by Nationwide Building Society, was at least in part because of a lack of available properties, whilst older, wealthier households disproportionately benefited from the accrual of savings during the pandemic. The revised March reading for the manufacturing Purchase Managers Index (PMI) recorded a further decline in the index versus preliminary and February outturns, and GDP growth was revised up, but on a sharp improvement in the current account balance that, at first glance was difficult to reconcile.
Interest rate expectations went basically nowhere. The markets continue to price in an aggressive series of hikes from the Bank of England (BoE) over coming meetings such that the Bank rate reaches 1.75% at the September meeting. I find such a scenario almost impossible to square with the information received from businesses in a wide variety of economic areas. They tell us that investment plans (capital and labour) are being scaled back, and the approach is to batten down the hatches. Interest rates may well rise far less than markets price for, which could have a very telling effect on the valuation of the GBP, in my opinion.
For this week there is really not much to wait for in terms of data or surveys due for release. I highly doubt that either the construction or services PMI readings for March, the latter a revision, will offer much comfort or insight for the UK’s economic fortunes. Speeches from BoE members Bailey, Cunliffe and Pill are likely to prove of greater interest in my opinion. What will they have to say about the outlook for the economy and the effectiveness of monetary policy adjustments?
In terms of the GBP, last week saw the pound struggle for headway against the USD, and fall again against the EUR. The risks are likely again to the downside for the GBP over the course of this week, in my opinion. Unless there is some sort of breakthrough in peace talks between Russia and Ukraine, some hint at higher UK rates than is already priced for, or there is an emerging problem in other major economies, sustained GBP upside looks unlikely, as far as I’m concerned.