ACM Update 12-05-25
The majority of market action was between the UK and US last week, with interest rate decisions from the Federal Reserve and the Bank of England. The former opted for a hold, whilst the UK central bank voted to reduce interest rates as inflation cools.
US-China trade war talks over the weekend have delivered an agreement this morning, with both sides reducing tariffs by 115%.
The week ahead features the latest on US inflation and retail sales, as well as UK GDP figures and an assortment of speeches from different corners of the Bank of England’s voting committee.
Following on from a UK bank holiday to start the week, it was a busy few days for central banks on both sides of the Atlantic. Both the meetings featured plenty of references towards Donald Trump and his tariffs.
In a shorter week for the UK following Monday’s bank holiday, the Bank of England meeting on Thursday lunchtime delivered their second rate cut of the year. Interest rates are now at their lowest level in two years at 4.25%, as inflation comes down and trade uncertainty rises.
The Bank were far from unanimous in their decision though. The Monetary Policy Committee was in fact split three ways in their voting, with two members wanting to hold rates, five for a 0.25% cut and two preferring a 0.5% cut. Arch hawk Catherine Mann and Chief Economist Huw Pill sought rates to remain in their current position, whilst Swati Dhingra and Alan Taylor were the pair opting for the larger rate cut.
As it was, the other five members (including Governor Andrew Bailey) had the majority, thus a 0.25% rate cut materialised. Given the prospect of a 0.50% cut though, Sterling in fact benefitted as the less severe outcome happened. This saw the Pound move up circa 0.5% on Thursday afternoon, peaking at just over 1.1800 at the time.
Thursday afternoon also saw the announcement of a “Trade Deal” between the UK and US. Sir Keir Starmer was proud to declare the first trade deal with the Trump administration, with the aim of “protecting British businesses and British jobs”. In the days since though, many UK businesses have been seeking clarity from the Government as to exactly what the trade deal means.
Following on from this, Andrew Bailey used a speech on Friday morning to speak about how the UK needs to “rebuild” trade relationships with the EU. Following on from the deal with the US, this now seems an obvious goal, in order to boost post-Brexit relations. The EU remains the UK’s largest trading partner.
His colleague Huw Pill meanwhile, doesn’t believe US tariffs will have a “dramatic” impact on the UK economy. This might well explain his vote to hold interest rates this week.
Aside from the interest rate announcement, there were few other UK releases. The Services PMI figure was 49.0 whilst Construction PMI was marginally above the expected figure at 46.6. Overall, Sterling-Dollar ended the week almost exactly where it started, close to the 1.33 figure. Movements on the pair can be seen in the chart below:
On the Dollar side of the coin, news was centred around the corresponding Federal Reserve interest rate announcement. As has been their recent narrative, tariff uncertainty led the committee to hold interest rates steady in the US, rather than any sort of pre-emptive cut before Trump’s policies fully kick in. Not knowing what the right pre-emptive policy response would be, was a major factor in the rate hold.
Chairman Jerome Powell used his subsequent press conference to suggest that the tariffs are likely to lead to “a rise in inflation, a slowdown in economic growth, and an increase in unemployment”. This was the first Fed meeting since the tariffs were unveiled, and the third in which they have held rates since their December cut.
Donald Trump responded in his own unique way, calling Powell “a fool” for not cutting interest rates. He also suggested such a move would be “like jet fuel” for financial markets and the overall economy.
A number of different Fed members spoke during the week too, with the majority of them in agreement that the current policy stance was the right one. For now, the employment market seems to remain stable near maximum employment, so the Fed can afford to be patient before deciding their next move.
In other releases, the US services sector recorded the slowest activity growth in 17 months, according to the most recent PMI figures. US weekly unemployment claims did soften slightly though to 228,000 when compared to the spike the previous week. This is now more in line with the norm.
Over the weekend US-China trade talks took place in Switzerland. These have led this morning to an agreement between the two countries to pause their trade war, with both countries reducing their reciprocal tariffs by 115%. This essentially returns tariffs to the position they were in prior to 2nd April.
The move has thus far been positive for the US Dollar this morning, regaining some of the lost ground recently. The greenback is now trading at its best in a month versus the Euro and Pound.
Following on from the ECB’s interest rate cut just before Easter, again it was another very quiet week on the continent. The latest Eurozone PPI figures for the month of March showed a drop of -1.6% following a steep decline in energy prices. The yearly prices now show a rise of 1.9%, just under the 2% target.
Retail Sales for the bloc also fell slightly, with a monthly drop of -0.1% in March. Services PMI figures were on the whole better than expected for Europe, with the 50.1 combined figure just scraping into expansionary territory.
German figures showed more reasons to be cheerful, as the DAX stock exchange climbed to a record high on Friday. This was predominantly on trade optimism ahead of further tariff talks taking place. Other German releases were also better, with factory orders recorded as up by 3.6% in March. The single currency enjoyed a buoyant end to the week as a result.
The gradual rise in Sterling-Euro can be seen in the chart below:
The week ahead:
Monday – BoE Lombardelli speech (09:00 UK time), BoE Greene speech (11:30), BoE Mann speech (13:50), BoE Taylor speech (17:00), US Federal Budget Balance (19:00)
Tuesday – UK Average Earnings & Unemployment Rate (07:00), BoE Pill speech (09:45), EU ZEW Economic Sentiment (10:00), US CPI inflation (13:30), BoE Bailey speech (16:00)
Wednesday – German CPI inflation (07:00), BoE Breeden speech (08:15), Fed Daly speech (22:40)
Thursday – UK GDP (07:00), US PPI, Retail Sales & Unemployment Claims (13:30), Fed Powell speech (19:00), BoE Dhingra speech (15:00)
Friday – EU Economic Forecasts (10:00), University of Michigan Consumer Sentiment (15:00)
With this morning’s early announcement on US-China trade talk results, the Dollar is very much in the ascendency this morning having regained circa 1% in the hours since the trade agreement press conference. We will likely see some degree of recovery in currencies that have lost ground since the tariff announcements at the start of May. These include the US Dollar, Canadian Dollar, and British Pound. Those weakening are the Swiss Franc and Japanese Yen.
This coming week is fairly heavy on speeches from Bank of England members. A lot of these are taking place during a King’s Business school event in central London, during the early part of the week. Given the split of last Thursday’s Bank meeting, these will be of interest.
From the UK we also have the Unemployment data for April, released on Tuesday morning. This is expected to show a slight rise in the overall unemployment rate to 4.5% (from 4.4%), but a cooling in the Average Earnings Index. This will be of most importance economically, as a reduction in the figure will mean less chance of further inflation pressure ongoing. The closer wage growth and inflation are, the more chance there is of keeping it under control.
The March GDP data for the UK is also released on Thursday. This will demonstrate the level of expansion in the economy in the month, but is projected to show a 0.0% growth, following the February 0.5% gain. Overall, Q1 is expected to net out at 0.6% growth, which would equal the best quarter for the UK since 2022.
In the US, April’s inflation figures will be in the spotlight on Tuesday afternoon. These are forecast to show a levelling out at 2.4% as with last month. However, with these figures including almost a full month of Trump’s tariff changes, then we could well see some deviation.
There will remain a lot of focus though on the trade talk outcome between the US and China, however. Currencies that have lost ground over the course of the last month will likely see some recovery as tensions begin to cool. Perhaps we have seen the peak on GBP-USD for now? Further US consumer sentiment figures released near the close on Friday will give more information on what the general public are thinking.
Given the foreign trade and macroeconomic announcements in recent days, foreign exchange markets are unsurprisingly on the move. The US-China trade talk outcome delivered movements of 1% within an hour on Dollar currency pairs, something which we can expect to continue seeing. These movements outline the volatility possible, thus make sure to reach out to the team to protect yourself against any upcoming fluctuations. We remain at your disposal.
Have a great week.
