This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Sterling has been in a deep slump of late, with the past fortnight seeing a whole host of economic data and central bank appearances that temper the idea that we will see a rate hike next month. The most crucial of these data points came in the form of last week’s inflation data, with consumer price index (CPI) hitting 2.5% from 2.7%; core CPI 2.3% from 2.4%, along with today’s gross domestic product (GDP) figure, which was 0.1% in Q1, vs 0.4% in Q4. While the fall in inflation reduced the pressure on the Bank of England (BoE) to act, it was the deterioration in Q1 growth which essentially eradicated the possibility of a rate rise. It comes as no surprise that we have seen a huge swing in market expectations for the May meeting, with the 88% expectations seen at the start of last week, now standing at 22% (down from 59% yesterday). The BoE has never raised rates in an environment where growth is lower than 0.4%.
However, while today’s GDP figure makes a rate rise highly unlikely, the fallout from these recent data points seems to have a greater significance than simply the May meeting. Markets are now pricing in November as the next BoE meeting with a strong chance of a rate rise (69%). There is a good chance that this is somewhat overcooked, for much of the negative data releases seen over the past fortnight can be attributed to the ‘Beast from the East’ in the UK. The significant disruption to businesses in the UK saw retail sales tumble, housing starts stutter, and a sharp deterioration in purchasing managers index (PMI) surveys across construction, manufacturing and services sectors for March. This was always going to impact Q1 GDP. However, the question from here on in is whether we are going to see a sharp pickup in Q2 economic data as we move clear of any weather related effects on growth.
On one side, today’s GDP reading is only the preliminary release, meaning that much of the March affected activity will have been estimated. Thus there is a high likeliness of revisions to the Q1 GDP figure once greater data is available. It is also notable that construction has been the major drag on GDP for the quarter, with the image below highlighting that services and production actually improved vs Q4. With the weather conditions likely to play a significant role in this, there is a strong chance we will see a rebound in Q2. Watch out for next week’s construction PMI as a signal of whether we are going to see a resurgence in the sector.