ACM Update 27-05-25
UK inflation took a turn back upwards in April, with a range of household bill increases kicking in. On the continent, the latest ECB minutes showed uncertainty amongst policymakers, but unity on direction.
In the US, Donald Trump “recommended” a 50% tariff for the EU, before agreeing to extend talks further over the weekend.
The final week of May is just four days but features an assortment of major US releases. These include the latest Federal Reserve minutes, GDP data and consumer confidence figures.
There was bad, but not unexpected news of a rise in UK inflation last week. April’s figures showed a jump back up to the highest in more than a year, as a raft of increases to household bills kicked in. With water, gas and electricity prices rising on 1st April, along with recent Labour tax changes, an uptick was indeed forecast. The size of the increase was more than had been expected though, with inflation now back to 3.5%.
The upward move in the metric offered some support to GBP, on the basis that higher inflation is likely to keep UK interest rates higher for longer. Two interest rate cuts had previously been projected for 2025, but that may now remain at the one we have seen to date. GBP rose versus other majors such as the Euro and US Dollar as a result, by around 0.5%.
With average earnings still well above inflation though, high street spending is still flowing well. Retail sales in the UK delivered a 1.2% month on month rise in April, their fourth monthly expansion in a row. House prices also continue to rise, up 6.4% annually according to recent figures.
Unfortunately, Government borrowing is still on the rise, and by more than expected. April’s numbers were £1bn higher than the same month last year and could well see Chancellor Reeves struggle to meet her own self-imposed borrowing/spending rules. Tax rises in the autumn are looking more and more likely as a result.
On the subject of monetary policy, there were a few MPC member speeches last week. Huw Pill, the Bank of England’s Chief Economist, spoke of the need for a cautious path of rate cuts to remain, having voted to hold in the recent meeting. Pill is against cutting too quickly and is also questioning the benefit of relying on projections, giving the ever-changing foreign trade landscape.
Overall then, a better week for GBP versus the USD. The pair rose to over 1.35, which broke a high dating back to the early part of 2022, Movements on Sterling-Dollar can be seen in the chart below:
As is often the case at present, last week was heavily Trump-focused for those watching the Dollar. However, markets are now seemingly taking his tariff threats more in their stride than they were just a month ago.
This was evident last week as Trump “recommended” a 50% tariff on the European Union, which he said in a post on his Truth Social platform should kick in on 1st June. The President cited a raft of “unfair and unjustified” taxes and trade barriers from the EU, which he claims lead to a trade deficit of $250 billion a year.
Stock markets were little moved though, and within a few days we have now seen Trump grant an extension to the US-EU tariff talks to 9th July. This followed a “very nice” call with EU Chief Ursula von der Leyen on Sunday. The current 25% tariffs on steel and aluminium remain in place.
Meanwhile back in the Capitol Building, the President’s “big, beautiful bill” on taxes narrowly made it through the House of Representatives with a one vote majority. The Republican package is only adding to recent Dollar weakness though, as it is expected to add trillions more to the existing $37 trillion national debt. Truly eye-watering numbers, which the Dollar felt last week as it weakened to the aforementioned GBP-USD low. The bill now moves on to the Senate.
Federal Reserve rate-setters meanwhile seem to be content with their monetary policy situation. A couple of them (Mary Daly & Beth Hammack) suggested last week that current policy is in the right place, but stressed a wait and see approach amidst all of the current uncertainty.
Raphael Bostic meanwhile suggests that he is now leaning towards just one US rate cut this year. The Atlanta Fed member thinks this will allow a balance between upward pressure on inflation and worries about a recession. The latter of which he sees no concerns regarding currently though, with more focus on foreign trade policy driving inflation.
On the continent, the latest ECB Minutes were released from their meeting on 17th April. These showed a more positive stance, but even greater economic uncertainty. The trigger had naturally been the Trump’s tariffs unveiled in early April, leading to further pessimism surrounding European economic growth. They also noted the change in Germany’s fiscal spending but remained cautious about any positive growth impact to come from it.
Given the meeting timing amidst much global uncertainty in mid-April, some members had thought about a pause in rate cuts. Others meanwhile thought a 50-basis point cut may have been needed. Eventually, the 0.25% cut prevailed. Their next meeting in June looks likely to deliver the same outcome, which would bring the headline rate down to circa 2%.
The other talking point was inflation, which the bank forecast to be lower throughout 2025 than they had suggested last month. Indeed, the April figure was released last week, recording 2.2% for the bloc. Will it be one more cut and then hold for the ECB?
Growth seems to be improving slightly on the continent too, where a rise of 2.3% in first quarter earnings (on average) was reported. This is up from the 1.9% which was projected a week ago. The EU is hoping their negotiations and any revised trade proposals with the US can keep these figures in the positive for the remainder of the year.
Overall, the GBP data did most of the driving on Sterling-Euro last week. The pair nudged back up to the best it had seen since Trump’s “Liberation Day” at the start of April. Movements can be seen below:
The week ahead:
Monday – UK & US BANK HOLIDAY
Tuesday – US Durable Goods Orders (13:30 UK time), US Consumer Confidence (15:00)
Wednesday – Australian CPI inflation (02:30), Reserve Bank of New Zealand rate announcement (03:00), Federal Reserve Meeting Minutes (19:00)
Thursday – FRA/GER/SWI BANK HOLIDAY, BoE Breeden speech (10:00), US Prelim GDP & Unemployment Claims (13:30), BoE Bailey speech (08:00)
Friday – German Prelim CPI inflation (07:00), Spanish Flash CPI (08:00), US Core PCE Price Index (13:30), UoM Consumer Sentiment & Inflation Expectations (15:00)
May closes out with little of note from the UK in terms of data. A Thursday evening speech from Andrew Bailey will be about all there is to get our teeth stuck into, so we may see the sterling upward movement from this week continue.
Most of the action will be from the US, with a real range of data squeezed into the four days. The Conference Board release their consumer confidence figures on Tuesday afternoon, before the minutes from the latest Federal Reserve meeting are published on Wednesday evening. These date from their gathering on 7th May, thus may be slightly outdated but will still provide an interesting insight as to opinions.
The preliminary GDP release for Q1 will also be of note. Can Trump continue to blame the Biden administration for a shrinking US economy at the start of the year? The Fed’s chosen inflation metric of Core PCE inflation also arrives on Friday lunchtime, delivering another insight into how Trump’s policies are impacting inflation. A jump up in this could see US interest rates stay where they are.
Further consumer sentiment and inflation expectations arise from the University of Michigan, to close out the week.
It may be a short week, but we have plenty of market events. With GBP-USD at a three plus year high, this presents a favourable opportunity for those needing to purchase USD, either now or in the near future. We can do so using methods such as a forward contract, to secure a rate for a date in the future. Make sure to discuss with your Aston point of contact for any information.
Have a great week.
