GBP under pressureAs UK GDP shrinks in AprilPaves way for 'dovish' BoE ThursdayAnd global stock markets slumpNI Protocol changes in focus today

Image © Adobe Images

The British Pound starts the new week softer against the Euro and Dollar in the wake of disappointing economic growth data and expectations the UK government will announce changes to the Northern Ireland Protocol, creating the potential for a fresh Brexit dispute with the European Union.

Global stock markets are meanwhile under intense selling pressure as China tightens Covid restrictions and U.S. bond yields surge in anticipation of aggressive U.S. Federal Reserve rate hikes, creating fresh demand for the U.S. Dollar.

The Pound to Euro exchange rate is down a third of a percent on the day at 1.1664 and in acknowledgement to the broader global market slump the Pound to Dollar exchange rate is down a more notable 0.50% at 1.2217. (Set your FX rate alert here).

Early focus on the Pound comes after the ONS announced UK GDP slumped 0.3% in April, down on the -0.1% recorded in March, disappointing against expectations for growth of 0.1%.

Quarter-on-quarter GDP rose 0.2% in thee three months to April, down on the 0.4% that was forecast.

Above: Contributions to monthly GDP growth, April 2021 to April 2022, UK. All main sectors contributed negatively to growth in April 2022. Source: Office for National Statistics - GDP monthly estimate.

Some downside pressure to the Pound will have been mitigated by the details of the report which show the ending of the Government's Covid testing regime subtracted a sizeable 0.5% from the headline figure, suggesting the headlines look worse than they actually are.

so expect economic growth will be "steady enough" for the ECB to hike rates by a larger increment.

"We expect the ECB to increase its Deposit Rate by 25 bps in July, 5

Nevertheless recent Bank of England projections showed they expected GDP would rise by 0.1% quarter on quarter in the second quarter.

But Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics, says the 0.3% month-on-month fall in April blows that forecast out of the water.

"We are now heading for a fall of 0.5-to-0.7% q/q in Q2 once you factor in the Jubilee," says Tombs.

He says there's now 0% chance the Bank hikes by 50bp this week, which if correct would likely pose downside risks to the Pound.

The Bank meets on Thursday and is expected to raise interest rates again as it continues its hiking cycle.

But the size of the hike could determine how the Pound behaves on the day.

Investors will also be looking looking at the guidance the Bank offers as to further interest rate hikes.

"On Thursday focus will shift to the BoE meeting, that will hike rates further and may even discuss 50bps move rather than a 25bps one. Indications pointing to a slightly steeper hike path would support the pound," says Asmara Jamaleh, Economist at Intesa Sanpaolo.

A 25 basis point hike and cautious guidance would be a combination that would likely weigh on the Pound

The Bank would typically hike interest rates in order to quell inflation but the slumping economy could mean the Bank sees a fading need to raise interest rates.

This could mean the Bank's current rate hiking cycle is nearing its end, which would weigh on the Pound.

"We expect a dovish BoE hike and remain bearish GBP," says Ebrahim Rahbari, analyst at Citi.

Above: File image. Chevening, United Kingdom. Foreign Secretary Liz Truss hosts the Vice President of the European Commission Maros Sefcovic at Chevening House as they meet to discuss the Northern Ireland protocol. Picture by Simon Dawson / No 10 Downing Street.

The UK is meanwhile set to publish legislation on Monday that will override parts of the Northern Ireland Protocol, which is anticipated to prompt a reaction by the European Union and potentially inject fresh volatility into Sterling markets.

Reports suggest the proposed legislation will remove the oversight of the European Court of Justice (ECJ) and hand the final judgment on disputes to the British courts under new powers that will effectively mean parts of the Northern Ireland Protocol do not apply.

It also seeks to remove almost all customs checks on products entering the province from Great Britain, creating a "green lane" for those goods destined for shelves in Northern Ireland.

Northern Irish businesses will be allowed to choose between following UK or EU regulations.

It will also fix "he unacceptable situation" whereby people in Northern Ireland cannot avail of the same tax benefits as everyone else in the UK, Whitehall sources told the Telegraph.

The move comes amidst political deadlock in Northern Ireland as the Unionist DUP said it won't form a power sharing government with Sinn Fein until the NI protocol is removed.

The UK government hopes its proposed changes will help end the deadlock and allow for the return for power sharing in the province.

But the European Union has been clear in that it will not accept the UK's moves and they have warned they will retaliate.

It is the nature of this retaliation that will have potential implications for the Pound. A more severe retaliation that could have implications for UK exports to the EU could be detrimental to the Pound.

But we note the Pound has shown a relatively sanguine response to news of the UK's decision to override parts of the NI protocol and wonder whether much of the developments are already 'in the price'.

If they are then the current developments might not be the hammer blow to the Pound that some might expect.

The Dollar is meanwhile in demand once more amidst a slump in global stock markets.

All the major indices are down sharply at the start of the new week with investors fretting over news China is rowing back from easing restrictions in the face of rising Covid cases, posing severe headwinds to global economic recovery prospects.

But for markets of more importance will be the ongoing surge in U.S. bond yields as markets anticipate an increasingly aggressive Federal Reserve interest rate hiking cycle.

The Dollar rose and markets fell on Friday after the U.S. reported inflation climbed further during May in defiance of market expectations for it to ease and with possible implications for Fed policy.

U.S. inflation rose 8.6% year-on-year last month as the month-on-month pace of inflation rose from 0.3% to a whopping 1% in May.

"The US dollar’s bullish momentum has been reinforced by the release of the much stronger than expected US CPI report on Friday," says Lee Hardman, Currency Analyst at MUFG.

"The latest inflation data from the US put considerable downward pressure on equities, and broad-based losses were apparent at the end of last week. More of the same looks possible in the near-term as the flight from risk gathers pace, and in anticipation of this week's meeting of the FOMC," says Bill McNamara at The Technical Trader.