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BoE policy unchanged, UK budget the focus

Focus this week will centre on the new Conservative government's supplementary budget (Wednesday). The headline budget trajectory of aggressive fiscal consolidation is not expected to be materially changed. 

At the margin, the Chancellor might wish to show greater consolidation in the first two years and relax the fiscal effort thereafter. More importantly, the Chancellor is expected to detail measures to achieve the expenditure reduction targets insisting in particular on cutting housing benefit and tax credits as well as outlining efforts to cut tax evasion and aggressive tax avoidance. GBP outperformance versus the EUR will be moderate as tight fiscal policy and institutional risks weigh on UK economic growth and result in more accommodative monetary policy.

Elsewhere, the Bank of England should leave its policy settings unchanged on Thursday, as widely expected, and therefore issue no statement. After communication by the more hawkish members of the MPC (Weale, McCafferty and Forbes) over the past month, dovish rhetoric returned last week amid mixed economic data. This came in the form of cautious comments from Governor Carney following the release of the Financial Stability Report and a speech from Chief Economist Andy Haldane which emphasized the risks of increasing rates too soon. 

"We continue to expect the first rate hike in Q1 2016 and a moderate pace of tightening thereafter (25bp per 6 months)" says Barclays.

In terms of data, Industrial and manufacturing output (Tuesday) is likely to decline 0.3% m/m (consensus: -0.2%) and 0.2% m/m (consensus: +0.1%) in May, respectively.

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