UK GDP figure strong but reality
check could be around the corner
Last week’s Q3 UK GDP figure beat expectations by some
distance (1.0% vs 0.6%), which triggered plenty of sterling demand. The boost
from the Olympics and the natural rebound from the extra bank holiday that
weighed on growth in the second quarter suggest that the economy has recouped
the 0.9% contraction that we saw in the first half of the year.
The much better than expected GDP figure is certainly
good news but if we take a step back, the truth is that the UK economy has done
little more than flat line in 2012 so far. Since the release, MPC members have
been quick to manage our expectations for Q4. Indeed, we are likely to see some
weak growth figures in the week ahead in the form of the monthly updates from
the UK manufacturing and construction sectors, which threatens to knock the
pound off its perch against the dollar in particular.
Despite the scepticism with which many are looking
upon the GDP figure, we do see it as likely to convince the BoE not to announce
another round of QE at its monthly meeting next week. Whilst there is clearly a
pro-QE voice within the MPC, we just doubt that the doves will be able to form
a majority next week.
US
growth in better shape ahead of key monthly employment data
Friday brings October’s US non-farm payrolls figure,
which is expected to show some further modest improvement. This, in combination
with last week’s forecast-beating US GDP figure (which indicated that the US
economy grew at an annualized pace of 2.0% in Q3) may well give global stock
markets a lift, taking away some demand from the safe-haven US dollar. As
things stand however, fears over Hurricane Sandy have instilled in the markets
a distinctly cautious tone at the start of this week, which has kept the
EUR/USD pair pinned down below $1.30.
The US dollar has certainly been on the ascendancy in
the past week, as frustrations over a lack of progress in Spain and Greece have
set in. The former country appears no closer to requesting a bailout, something
which is clearly testing the markets’ patience by the look of rising Spanish
bond yields. Also weighing on the euro last week were some very disappointing
German economic figures – this weak growth story running behind the debt crisis
is a key driver behind our negative outlook for the euro in the coming months. We
have had some poor German employment data out this morning, which has been a
source of concern, though the euro has been given a helping hand today by a
positive Italian bond auction.
End of week forecast
|
GBP /
EUR
|
1.2400
|
|
GBP /
USD
|
1.5950
|
|
EUR /
USD
|
1.2860
|
|
GBP /
AUD
|
1.5550
|
|
|
|
Sterling is trading at €1.24 this morning and faces a
difficult end to the week in the form of domestic growth data at the end of the
week. We see EUR/USD paring back from its current $1.2950 level, which should
help GBP/EUR fall no lower than €1.2350. We still fancy a move above €1.25 in
the coming month or so, which could actually bring a move significantly higher
into sight provided the BoE holds off from further QE.
GBP/USD’s rallies are running out of steam at early
stages and a sustained move below $1.60 is still our best bet.
Richard Driver
Currency Analyst
Caxton FX
