UK growth data disappoints
The monthly instalment of growth data from the UK economy was weaker than expected. The manufacturing sector contracted again, and we saw the sharpest slide in the UK services sector in a decade. Sterling has not suffered too much as a result (except against the dollar), with the market focused on wider global concerns. The Bank of England meets again this week and there is likely to be increased discussion of monetary easing in light of recent economic data. Our bet is that given the UK services sector remains in expansionist territory, they will hold fire for now.
Poor US non-farms data adds to QE3 speculation
There was some promising data from the US last week; PMI data from Chicago was impressive, as was a factory orders figure. However, some awful consumer confidence and non-farm payrolls data stole the headlines. The former gave its worst showing in over two years, and the latter gave its worse showing in almost a year. The safer dollar is therefore outperforming at present, with global stocks in decline amid the familiar concerns over global (and particularly US) growth and the eurozone crisis.
Nonetheless, we are sticking to our longer-term forecast of a weaker US dollar. The Fed will be having an extended discussion as to monetary policy responses to the US economic slowdown at its meeting this month. If data continues to decline, we may well see Ben Bernanke’s hand forced on QE3. The major US data releases this week include non-manufacturing PMI data on Tuesday afternoon and trade balance data on Thursday. In truth though, the dollar’s performance this week will probably depend on risk appetite and activity in the global equity markets. The dollar is approaching the upper limits of its trading ranges against both the euro and the pound at present. We doubt that there is sufficient momentum for the dollar to push through these barriers, though there remains significant risk.
Eurozone concerns weigh on the single currency
Merkel suffered another German election defeat, this time in her home state, which has added to already heightened market uncertainty. The growing signs of domestic frustration at Germany’s leading role in eurozone bailouts are a real concern. In addition, the market is nervous ahead of Wednesday’s constitutional ruling from a German court on the country’s contribution to the bailouts.
Greece is also back in the headlines, with various nations demanding collateral for their contributions to the troubled nation’s second bailout, and with Greek officials in disagreement with the IMF/EU/ECB over further budget cuts. With all these eurozone issues weighing and more besides, EUR is definitely on the back foot. Nonetheless, Asian sovereigns have been very reliable in buying the euro on dips this year, and with EUR/USD at $1.41, the euro looks unlikely to fall too much further.
Sterling is trading at 1.14 against the euro; it has a little more upside but should meet some fairly stiff resistance around €1.15. These look to be poor levels for GBP/USD, which is very close to multi-week lows. We are confident EUR/USD and GBP/USD will bounce this month, but this may have to wait for this week.
End of week forecast
GBP / EUR 1.14
GBP / USD 1.62
EUR / USD 1.42
GBP / AUD 1.5350
Richard Driver
Senior Analyst – Caxton FX
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