European and US markets both underwent mixed sessions yesterday, as concerns over a slowdown in the Chinese and US economies prompted a sell-off in commodity prices, which weighed on the basic resource and energy sector.
Copper prices hit their lowest level this year, while crude oil prices slid for the second day in a row, after Chinese producer prices slipped further into deflation territory at -3.6%, and CPI inflation hit its weakest level in two years. US PPI also slowed more than expected, slipping back from 2.7% to 2.3% and the lowest level since January 2021, on similar concerns over weakening demand and a possible economic slowdown. With weakness in US regional banks also making a brief return, sentiment across markets continues to remain fragile. Nonetheless we did see a modest recovery off the lows of the day for US markets, after the debt ceiling meeting was pushed into next week, and this looks set to translate into a positive European open.
Yesterday we saw the Bank of England raise interest rates by 25bps to 4.5%, while upgrading their forecasts for the UK economy, predicting a 0.2% economic expansion for Q1 and Q2, only six months after predicting that the UK economy wouldn’t grow at all in 2023 and that the UK economy was also in recession in Q4. They also revised up their full-year forecast for 2023 to 0.25%, a decent uplift from the previous -0.3% forecast from February. Given their track record with respect to financial forecasting, let’s hope the Bank of England is correct in this specific forecast.
We don’t have long to wait to see if they are right when it comes to Q1 GDP, with today’s release of the first iteration, after the surprise upgrade to Q4 that saw the UK economy eke out growth of 0.1%, and confounding the expectation of a technical recession. The first three months of this year have seen the economy perform much better than even the most optimistic of forecasts, leaving lots of egg on the faces of those who were predicting all manner of disasters during the twilight weeks of last year. The OBR, IMF, OECD, and Bank of England have all been proved to be unduly pessimistic in their assessments of the UK economy in recent months, particularly when it comes to growth.
The unexpected weakness in commodity prices, namely oil and gas, as well as the milder weather has certainly helped, while consumer spending has proven to be much more resilient. That’s not to say that the UK economy doesn’t have its challenges, with the current government, as well as political opponents seemingly intent on strapping a ball and chain around its ankle with higher taxes and incoherent economic policies.
Despite still eye-wateringly high inflation and a central bank that appears to be afflicted by consistent foot-in-mouth commentary about how the economy is performing, we can expect to see an improvement on the economic performance at the end of last year. With retail sales and the services sector showing solid signs of an improvement, we should see a modest expansion in Q1, with the monthly GDP numbers for the first three months of this year showing growth of 0.4% for January, 0% for February, and an expectation of 0% for March, despite the banking turmoil during that month. Expectations are for a 0.2% expansion for Q1. Index of services is expected to drive the expansion along with private consumption. Industrial and manufacturing production are both expected to stagnate in March, following on from similarly weak readings in February.
EUR/USD – having slipped below support at the 1.0940 area yesterday, we look set to see a me towards the 1.0870 area, and even lower towards 1.0835. A break above 1.1120 is needed to signal further gains towards 1.1200.
GBP/USD – yesterday’s failure to hold above 1.2600 has seen the pound slip back with the move below 1.2530 opening the possibility of a move towards 1.2430, and 1.2370. Sentiment remains bullish unless we see a decline through 1.2350. Interim resistance now at 1.2620.
EUR/GBP – rebounded from the 0.8660 area and has retested the 200-day SMA. A move back through 0.8760 could see a return to the 0.8820 area.
USD/JPY – slid back to the 133.50 area with a break lower arguing for a move towards 132.30. Resistance currently at the highs this week at 135.50.