United Kingdom: Economic Slowdown and Monetary Policy Outlook

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Contraction in Services Sector: The UK's services sector, which accounts for approximately 75% of the economy, experienced a decline in activity for the first time since October 2023. The S&P Global UK Services PMI fell to 49.0 in April, indicating contraction. This downturn was attributed to global trade tensions, particularly the impact of U.S. tariffs, and domestic challenges such as higher taxes leading to increased costs and job cuts among smaller firms.

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Anticipation of Bank of England Rate Cut: Ahead of the Bank of England's (BoE) policy meeting on May 8, markets anticipated a 25 basis point rate cut, with a total of 94 basis points priced in by year-end. Factors such as easing inflation dynamics, reduced global energy prices, and a strong sterling suggested a lower inflation outlook. However, near-term risks persisted, including rising utility costs and increased labour expenses.
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Sterling's Performance: Despite the economic challenges, the British pound remained near its highest level since February 2022, trading at $1.3333 on May 7. However, it declined by 0.25% against the U.S. dollar, influenced by the anticipation of the BoE's policy decision and broader market dynamics.

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United States: Trade Deficit and Federal Reserve's Stance

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Record Trade Deficit: The U.S. trade deficit reached a record $140.5 billion in March, driven by a surge in imports as businesses stockpiled goods ahead of impending tariffs introduced by President Trump's administration. This contributed to a 0.3% contraction in the U.S. economy during the first quarter.

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Federal Reserve's Interest Rate Decision: The Federal Reserve concluded its policy meeting amid heightened market uncertainty due to the newly introduced "liberation day" tariffs. While the Fed maintained interest rates between 4.25% and 4.5%, investors closely monitored the central bank's response to the potential economic slowdown and inflationary pressures resulting from the tariffs.

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Market Reactions: U.S. stock futures rose ahead of the Federal Reserve's interest rate announcement, with the S&P 500 and Nasdaq futures up by 0.6%, and the Dow Jones futures increasing by 0.7%. Positive corporate earnings, such as Walt Disney Co.'s strong second-quarter results, contributed to the optimistic market sentiment.
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