Sterling sinks as disastrous GDP data puts BoE May hike in serious doubt

This is a very disappointing reading and compound concerns over the state of the UK economy following last week’s downbeat set of retail sales, inflation and wage growth data. An interest rate hike from the BoE at its May meeting seems very unlikely, with the market pricing in less than a 25% chance of a hike, at the time of writing, versus the near 90% only two weeks ago. A hike in the summer remains possible, although the monetary policy committee would need to see an improvement in hard data, in the coming months, in order to convince them that the slowdown in the first quarter of the year was merely temporary.

Euro falls to three month low on Draghi’s lack of forward guidance

The Euro fell sharply to its weakest position against the US Dollar since mid-January, on Thursday afternoon after ECB President Draghi failed to provide any change to the bank’s forward guidance.

The bank’s monetary policy statement was left unaltered and identical to that of the previous meeting at the beginning of March. During his press conference, Draghi noted that inflation was subdued and that an ample degree of stimulus was still needed. He did, however, appear mostly unfazed by recent soft macroeconomic data, stating that the recent ease in growth from last year’s high pace may reflect temporary factors, and that a normalisation was expected.

We may get more concrete forward guidance at the ECB’s next meeting in June. However, given Draghi’s statement on how future policy has not been discussed yet , there is a good chance that we may have to wait until the July ECB meeting for any suggestions on the QE programme’s extension date beyond September 2018.

US jobless claims fall to 48-year low

An impressive set of economic data in the US may also provided a catalyst for the Euro’s sharp reversal versus the greenback yesterday.

Durable goods orders were impressive, rising by a better-than-expected 2.6% in March, following an increase in aircraft orders. Initial jobless claims were even more encouraging. Claims last week shot down to just 209,000 from a previous 233,000, its lowest level in 48 years. This continues to suggest that the US labour market is currently firing on all cylinders and supports our view that an accelerated pace of hikes is warranted by the Federal Reserve.

Following the bout of recent disappointing macroeconomic data, the market was prepared for a more bearish assessment from Draghi than what we eventually received. This apparent lack of concern regarding a potential economic slowdown was reflected in the Euro. The currency edged modestly higher during the course of the press conference and saw a sharp decline after it was finished, as investors reacted to the lack of clues regarding a potential tapering or end date to its quantitative easing programme.