Yesterday’s European Central Bank policy meeting was largely uneventful although President Draghi’s post-meeting press conference was on the whole marginally bearish. As largely expected the ECB kept its monetary policy settings (interest rates and QE parameters) unchanged and the accompanying statement was effectively a copy and paste of the March meeting statement. The Euro initially rallied a bit, including versus the Dollar, on the back of Draghi’s encouraging opening statement that Eurozone growth remains solid and broad-based. But his cautionary tone saw the Euro backtrack, with Draghi acknowledging that “All countries reported some moderation of growth and loss of momentum”, and EUR/USD fell to a new three-month low just above 1.21.
The EUR/USD cross has remained under pressure this morning in the face of Dollar strength but it’s Sterling’s collapse following the release of weaker-than-expected GDP growth which stands out. GBP/EUR climbed to a one-week high of 1.15 in the wake of yesterday’s ECB meeting but has given back all its gains to trade around 1.143 as markets digest the sharp slowdown in UK GDP growth to 0.1% qoq in Q1 from 0.4% qoq in Q4 2017.
This is the slowest growth rate since Q4 2012 and a rate hike at the Bank of England’s 10th May policy meeting now looks unlikely. The Office of National Statistics said that bad weather had only had a small negative effect, with the sharp slowdown in headline growth due to weak construction and consumption growth. Only a few weeks ago markets were pricing in an 80% probability of a 25bp rate hike in May. Governor Carney last week poured some cold water on whether it would hike at its next meeting and today’s GDP data, while subject to revisions, was probably the last nail in the coffin.
It is clear that underlying GDP growth in the UK remains very soft and Carney last week was clear that Brexit-related uncertainty was partly responsible. Flat-lining real wage growth is also part of the problem and the British economy may also be suffering from a broad-based slowdown in European growth. GDP growth in France – the European Unions’ second largest economy after Germany – slowed to 0.3% qoq from 0.7% qoq in Q4 2017 while growth in Spain (EU’s fifth largest) was unchanged at 0.7% qoq (based on preliminary data).
The bottom line is that the economic backdrop has deteriorated in the Eurozone but worsened even more and from a weaker starting point in the UK and this tilts the risks towards further GBP/EUR downside.
