Sterling kept out in the
cold despite host of strong UK figures
It was a good news week as far as the UK economy was
concerned last week. We saw some more positive UK labour data; the unemployment
rate dropped 7.9%, which is the lowest seen in over a year. Meanwhile, there
were four thousand less jobless claimants; the improvements being seen in the
domestic labour market are being sustained far beyond what many had expected.
UK retail sales data was also stronger than expected
last week, while the public sector net borrowing figure also revealed that the
government borrowed the least in the month of September since 2008. The chances
are that Osborne will still miss his deficit-reduction targets but things
appear not to be as bad as once feared.
Another development last week, which should have been positive for the pound,
was a rather less dovish MPC minutes than expected. There appears to be a clear
dovish voice within the MPC, led by David Miles, but there is no doubt that
there are plenty in the nine-member committee who doubt that the UK economy
needs a further dose of quantitative easing. Better still for the pound was the
skepticism of some MPC members that more QE would actually be of any real
practical benefit. Mervyn King speaks this evening and will perhaps provide
some further clues. UK inflation has dropped to almost a three-year low, which
is not exactly supportive of the pound but it was quite surprising to see the
market ignore last week’s slew of genuinely upbeat economic figures. This week
brings the long-awaited preliminary UK GDP figure for the third quarter; a
showing of 0.6% is the consensus expectation, which should give the pound some
belated support.
EU
Summit hardly set the market on fire
It won’t come as much of a shock to learn that last
week’s EU Summit yielded little by way of ground-breaking progress on the
eurozone’s various debt issues. Merkel even said herself that this wasn’t a
Summit where decisions would be made, rather it would pave the way for decisions
to be made in December. Headlines focused around the banking union, which is
expected to come into being at some point next year, but there was little to
get excited about. Market nerves continue to ease though, as demonstrated by declines
in Spanish bond yields, despite the fact that we remain in the dark with
respect to the timing of bailout request from PM Rajoy.
There is plenty of eurozone growth data to keep an eye
on this week, with investors possibly most concerned with conditions in
Germany. A key gauge of the German business climate was surprisingly weak last
time around and Wednesday morning should shed further light on this issue.
The euro has made a soft start to Tuesday’s session; Greece
has stated that a deal must be reached on a €13.5bn package of cuts by
Wednesday night, while Moody’s has downgraded five Spanish banks. This has helped
sterling climb half a cent above its 5 ½ month lows of €1.2250. EUR/USD has
also fallen to $1.30, which should see plenty of euro-buyers return in the
short-term.
Sterling has lost grip of the $1.60 level this
morning, a development we have anticipated for a while, though we have had to
be patient. It now trades at a six week low of $1.5990 and direction from here
all depends on what happens to the EUR/USD pair. Our base line scenario is for further
losses for both pairs this week.
End of week forecast
GBP / EUR
|
1.2325
|
GBP / USD
|
1.5975
|
EUR / USD
|
1.2950
|
GBP / AUD
|
1.5675
|
Richard Driver
Currency Analyst
Caxton FX
|
