Sterling sinks on expectations of Bank of England stimulus, US growth revised upwards

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30 September 2016

Auteur
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

The Pound continued to look increasingly fragile on Thursday, falling against both the Euro and the US Dollar on growing expectations that the Bank of England might ease its monetary policy further in the coming months.

R
ecent rhetoric from policymakers in the UK has been mixed, although investors continue to fret that a further slowdown in economic data in the coming weeks could force the central bank to slash rates by an additional 15 basis points as early as its November meeting. Data out of the UK yesterday showed that mortgage approvals slumped to their lowest level since November 2014, providing extra evidence to suggest that Britain’s housing market has been slowing since the Brexit vote.

Yesterday’s US GDP numbers surprised to the upside, providing the Federal Reserve with further incentive to hike interest rates again before the end of the year. The US economy grew by a fairly sluggish 1.4% in the second quarter, albeit much higher than the original 1.1% estimate. An increase in net exports and growing business investment in the three months to July suggest the world’s largest economy remains in fairly good health, despite suffering from a reasonably abrupt slowdown in the past twelve months.

Meanwhile, the Euro fell back below the 1.12 level this morning after ECB member Ignazio Visco claimed that the central bank’s QE programme ‘does not end in March 2017’, suggesting that it will likely be extended beyond its existing timeline.

German inflation data beat expectations on Thursday. Consumer price growth in Europe’s largest economy rose to 0.7%, its highest level since May 2015. A similarly strong inflation print for the wider Euro-area this afternoon would certainly take pressure off the European Central Bank to ramp up its quantitative easing programme in the coming months.

Eurozone inflation and unemployment numbers this morning look likely to be the main announcements in the currency markets today. Second quarter growth figures in the UK are not expected to be a big market mover.

Major currencies in detail:

GBP

Sterling continued to edge back towards its multi-decade low against the US Dollar, falling 0.35% back below the 1.30 level.

Mortgage approvals in August came in surprisingly weak yesterday. Approvals slumped to a near two year low of 60,058 in the latest sign that the housing market has cooled since Britain voted in favour of leaving the European Union.

Economic news was mixed, however, with net lending rising to £1.57 billion in August, while consumer confidence surged to -1 from -7, its largest increase in over a year. This suggests that uncertainty following the Brexit vote was not having any material effect on spending patterns among Britain’s consumers.

Revised GDP figures this morning may receive some attention, although the limited Brexit vote reflection means it might prove a non-event.

EUR

Dovish comments from ECB member Visco this morning sent the Euro 0.3% lower against the Dollar on Thursday.

Economic sentiment increased in September according to the European Commission. The index rose to 104.9 from 103.5, its highest level since January with Europeans seemingly brushing aside any lingering concerns following June’s Brexit vote.

The Bank of Spain also upgraded its growth forecast for this year, despite the negative effect from the recent oil price slump and low inflation. Spain’s central bank now expects the country to grow by 3.2% this year, up from a previous estimate of just 2.7%.

The unemployment rate and CPI data will be the main focal points in the Eurozone this morning. German retail sales will also be worth noting.

USD

The Dollar had a mixed session on Thursday, although rose on Euro weakness this morning with the Dollar index increasing 0.25%.

Senior Federal Reserve policymaker Dennis Lockhart spoke in Orlando yesterday, striking a similar tone to recent hawkish rhetoric from Chair Janet Yellen. Lockhart claimed he was ‘comfortable’ with the central bank raising rates in the near future, dependent on data, which could happen as soon as the November meeting.

The strength of the US labour market is, it seems, more than ready for another rate hike. Initial jobless claims beat expectations again for last week, remaining around a four decade low at 254,000.

Today will be another busy day in the US with consumer spending and income data the main announcements at 13:30 UK time.

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