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Bank of England slashes UK growth prospects, Pound tumbles again

Today’s macro highlights:

  • EUR - Mario Draghi speaks at EU State of the Union conference
  • USD - University of Michigan Consumer Sentiment (May)

Bank of England slashes UK growth prospects, Pound tumbles again

There was no shortage of fundamental data on the table yesterday but the stand out point was arguably the Bank of England cutting its growth forecast for 2018 from 1.8% to 1.4%. As expected there was no change to monetary policy, leaving the Pound to fall by around one and a half cents at one point. Cable stopped just short of finding fresh lows for the year however, with the fact that an August rate hike remains a distinct possibility lending a degree of support here. US inflation data also came in a little softer than had been forecast, again helping limit the sell off for GBP/USD.

The Euro found some popularity yesterday as a result of selling on both the Pound and the US dollar. EUR/USD posted its first daily gain in over a week as a result, but the move could prove short lived. Moves are afoot in Italy that would see a populist, Eurosceptic coalition formed, averting the need for another election in the summer but with potentially damaging implications for the grand European project. Brussels is seen by the coalition members as the cause of the damaging austerity Italy has seen over the last decade, whilst there’s also speculation the country may look to abandon the Euro.

Mario Draghi’s speech to the EU State of the Union conference at 2.15pm BST - coincidentally being held in Italy - will also attract attention today. The ECB has been keen to talk around the softening economic data that the Eurozone has seen of late, but any meaningful acknowledgement that a slowdown is playing out could quickly see yesterday’s gains for the common currency being reversed.

Across the Atlantic we have the preliminary May reading of the University of Michigan sentiment index at 3pm BST. This is expected to show a modest downturn from last month, but in the wake of the strong run of gains we’ve seen for the US dollar across the board since mid-April, any meaningful weakness here could again be a reason to pressure the greenback further. Ultimately, it’s the Federal Reserve’s objective to manage future inflationary pressures and given the data we’re seeing released right now, they appear to have the balance right. Anything that points towards a more dovish policy stance being seen in the second half of the year will be dollar negative.

Cable trade briefly below 1.35 yesterday but just failed to find fresh lows for the year. Looking at how the pair reacted to the moderately better than expected construction and manufacturing readings yesterday morning, it does seem as if there’s a willingness to cheer the Pound at any opportunity - the glass is being seen as half full.

The pair posted gains yesterday for the first time in over a week, but the rally stopped short of breaking the January lows. With lukewarm economic data and the mounting political risk we’re seeing in Italy, a return to the December lows around 1.17 remains possible.

The pound had its worst day against the Euro in almost two weeks, dropping by around 0.8 cents. However with nothing on the UK economic calendar in the short term and the focus being very much on the Eurozone, a return to the late April highs around 1.15 could be seen - so long as domestic political risk from Brexit negotiations remains in check.