ACM Update 19-05-25
Donald Trump spent his week touring the Middle East, announcing a major investment deal with Saudi Arabia in the process. Back in the US the latest inflation figures were released, before Friday closed with another credit rating downgrade.
UK news saw growth beating expectations, with Q1 producing a 0.7% rise in GDP. The fastest growing G7 economy in Q1? – Yes. Potential frontloading prior to trade tariffs and concerns about domestic tax hikes? – Likely.
The coming days will deliver the latest on UK inflation, which is expected to have bounced back up considerably, as well as the G7 Summit taking place in Canada.
Trump was racking up the air miles aboard Air Force One last week, with a quick-fire tour of the Middle East. The US President inked a string of deals in the region, with stops in Saudi Arabia, Qatar and the United Arab Emirates. The headline-grabbing agreements included commitment from Saudi Arabia to invest over $600 billion in the US market, Qatar to buy a fleet of Boeing planes and the construction of an AI data centre in the UAE.
On Friday, whilst setting off for his Washington return from Abu Dhabi, Trump took a jab at his “42-year-old Boeing” aircraft. Just a few days earlier, he had been promised an updated version of the same model, gifted by Qatar, crucially to the US Government and not to him personally.
On the subject of tariffs, the President suggested on Friday that trade negotiators will be contacting around 150 countries with new tariff information. His team would be “sending letters out” soon as there was not enough time to agree country-specific deals prior to his self-imposed July deadline.
Back on US shores, inflation data was released which showed a fall to a 50-month low in April. The reading of 2.3% showed inflation slowing, down from 2.4% the month before. This is likely to be the calm before the storm though, with tariff-related inflation changes expected to appear over the coming months.
The data is likely to assist in taking pressure off the Federal Reserve to cut interest rates. This combined with last weekend’s trade deal with China and the massive investment from Saudi Arabia, is renewing confidence in the US economy. The Fed can therefore afford to wait and see on monetary policy for a little longer. The Dollar found stability from this during the week, as the prospect of interest rate cuts got kicked further down the road.
Another US data release showed that the US economy is already seeing a slight slowdown in some areas. Retail Sales figures for April showed a like-for-like contraction of -0.1% in the month. Friday afternoon saw consumer sentiment figures remain at their lowest level in over three years, in a well-regarded University of Michigan survey. Their equivalent inflation projection saw Americans expecting inflation to be back at 7.3% within a year.
Federal Reserve Chairman, Jerome Powell echoed the fact that the full impact of tariff pressures on inflation is still to come.
Late on Friday, the Dollar lost ground as its credit rating was downgraded by Moody’s. This is the third of the big three ratings agencies to do so, citing increasing debts throughout the last few presidencies. This marks the first time that Moody’s have not held a perfect credit rating for the US in over 100 years, whilst they also moved their US economic outlook to “negative”.
After a boost from the US-China trade deal at the start of the week, the Dollar lost ground on Friday and in early Monday trading, after the credit rating downgrade. Movements on the pair can be seen in the chart below:
On the UK side, we had the news last week that the UK economy grew by a better than expected 0.2% in March, producing a total expansion of 0.7% in Q1. This was quoted as the Government’s economic plan “beginning to turn a corner” according to Chancellor Rachel Reeves. She gave herself a firm pat on the back in proudly proclaiming that the UK was therefore the fastest growing G7 economy in Q1.
However, these figures are for the period before US tariffs were implemented and also were prior to tax increases which kicked in at the start of April. Most analysts therefore warned that the rate of growth was unlikely to continue. The Shadow Chancellor, Mel Stride, echoed this in suggesting it was “a bit premature to be popping the champagne corks”.
To back up the sentiment of exports being brought forward to avoid tariffs, figures showed that export volumes has increased by 3.5% in Q1. Business investment and consumer spending were positive contributory factors in the growth.
Other figures showed the Unemployment rate nudged up a fraction in March, to 4.5%. This was the final month before the employer tax changes came into place. Wage growth slowed fractionally in March too, down from 5.7% to 5.5%, but is still running well ahead of inflation. The latest figures on that come this week.
The latest figures from the British Retail Consortium meanwhile showed good news on high street spending. The reading showed a 6.8% growth in like-for-like sales in April, the biggest jump in over three years. Are UK consumers spending more domestically with the threat of US tariffs?
In a rare occurrence, eight of the nine members of the Bank of England’s Monetary Policy Committee spoke at various events last week. Each have their own agenda and thoughts, but the split from the last meeting was evident.
Catherine Mann and Huw Pill both voted to hold policy last week. Mann attributed her change of stance to a far more resilient jobs market in the UK, whilst Chief Economist Huw Pill believes that interest rates may need to stay higher for longer due to tariff shocks, whilst having concerns about UK growth.
Clare Lombardelli suggested that wage growth is still far too high for inflation to come down, with this area being her main focus. She also noted that the US-China trade deal was good news for the UK, whilst suggesting slight progress on domestic inflation, not US tariffs, was the reason for her vote to cut.
Of the other speeches, external member Alan Taylor noted a sense of caution and concern within UK businesses. Tariff shocks were bigger than he had expected. Counterpart Megan Greene meanwhile felt wages and inflation were heading the right way but expects them to remain too high in the medium term.
On the continent, economic growth remains a struggle. The bloc managed a downwardly revised growth of 0.3% in Q1, which mirrored the same quarter in 2024. With inflation in the bloc now running at 2.2%, close to the ECB’s target, we can expect more interest rate cuts to come. The next ECB meeting arrives on 5th June and the recent trend of 0.25% rate cuts, seems highly likely again.
In positive news, the ECB trade balance figures came in better than expected. Equally economic sentiment figures from Germany and the continent as a whole, were above expectation also.
We also heard from a couple of ECB members last week. Joachim Nagel reaffirmed that the upcoming June rate decision was not a foregone conclusion for another 25-basis point rate cut. He suggested that upcoming data will remain the deciding factor. Markets are still pricing in a 90% chance of a rate cut in June, then one more cut later this year.
Fellow policymaker Martin Kazaks suggested that the ECB are close to bottoming out in terms of interest rates. “If the baseline scenario holds, then I think we are relatively close to the terminal rate already” was his standout comment, before agreeing a couple more cuts may be possible. His French ECB compatriot, Francois Villeroy de Galhau, sees more cuts than two to be likely though.
Overall, Sterling enjoyed an upward week versus the Euro, closing at circa 1.19 on Friday afternoon:
The week ahead:
Monday – EU Final CPI (10:00 UK time), Canada Bank Holiday
Tuesday – Reserve Bank of Australia rate announcement (05:30), BoE Pill speech (09:00), Eurozone Consumer Confidence (15:00), G7 Meetings (Tue-Thu)
Wednesday – UK CPI inflation (07:00), ECB Financial Stability Review (09:00)
Thursday – UK Public Sector Net Borrowing (07:00), EU/UK/US Manufacturing & Services PMIs (08:15-14:45), ECB Meeting Minutes (12:30), BoE Dhingra speech (13:00), BoE Pill speech (13:30)
Friday – UK Retail Sales (07:00)
A brief note that next Monday (26th May) is a public holiday in both the UK and US, for the Spring Bank Holiday and Memorial Day respectively. The Aston offices will be closed for the day, reopening on Tuesday 27th as normal.
After a central London summit today, it seems that the UK and EU are rebuilding some of their relationship post-Brexit. Details remain vague at the moment, but a further 12-year fishing agreement for EU boats in UK waters is the headline grabber. Defence and security will naturally be an important point too.
In terms of economic data, the US side is relatively quiet this week. The fallout from the credit rating downgrade late on Friday has seen the Dollar weaken sharply this morning in early Asian trading. This has pushed GBP-USD to around 0.4% away from a three year high, thus presenting a favourable Dollar-buying opportunity. The ongoing interest rate path in the US will continue to be a key focus.
UK inflation is released on Wednesday, projected to rise back up to 3.6% in April. The forecast spike is being attributed to a fresh round of household bill increases, namely in energy and water bills. The energy price cap rose by 6.4% in April. This comes at the same time as increasing employer payroll costs and higher minimum wages, all adding fuel to the inflationary fire. The move is unlikely to be a surprise to the Bank of England however.
UK Public Sector Net Borrowing and Retail Sales data close out the week, whilst the G7 meetings in Canada will be of importance also.
With GBP-USD at a high, this presents favourable conditions for those buying Dollars. Limit orders (setting an automated trigger to buy at a set level) are a useful tool in the current climate, as well as the ability to reserve currency for a date in the future using a forward contract. Reach out to the team for more information.
Have a great week
