Markets are relatively flat this morning as participants wait and see what will be the outcome of two major pieces of economic data due out this afternoon. First we will see the Bank of England release its decision at 12:00 GMT on whether or not to alter interest rates or their asset purchase program. Whilst both of these are expected to remain as they are, market participants look keen to wait until these decisions are confirmed before taking a position within the markets.
A little later this afternoon we will see an ECB Monetary Policy Statement and press conference at 13:30 GMT. As in the UK, the ECB are expected to keep interest rates on hold at their record low of 0.75%. Whilst the Eurozone appears to have been stabilizing recently, there has however been no spectacular data release to suggest that a rate change at present would be warranted.
Elsewhere today we have seen commodity currencies react favourably to the positive data released in China this morning. Figures show that the Chinese Trade Balance rose substantially in December, reaching 31.6B for the month, well above market expectations of 19.7B. The Australian Dollar rose to its highest point against the Japanese Yen in four years following the data release, and is currently trading at AUD/JPY 93.23. The Aussie Dollar was also aided by Japanese Prime Minister Shinzo Abe, who has called for the Bank of Japan to raise inflation targets to 2%, weakening the Yen right across the board.
Cable is trapped. GBP/USD has been trading pretty much sideways for the last couple of days and appears trapped in a clearly defined channel, a break either side of which could be very significant. Fibonacci levels show clear support at 1.6010 and substantial resistance at 1.6124, with a further key level found in between at 1.6067, which is where the pair is currently trading. A break above the upper price level would suggest a move back towards 1.6309 and potentially a test of the recent sixteen month high of 1.6381. Conversely, should the lower end of the current price channel give way, the pair is expected to fall back to the next area of key support at 1.5909 and below this the four month low of 1.5825 could be tested once again.
The key question is obviously; which way will the pair break? Cable is currently in a six month upward trend and what could make or break this trend could well be economic data released later this week. Tomorrow we will see the Bank of England release their interest rate decision at 12:00 GMT. Whilst rates are expected to remain at their current levels, any increase, or even a suggestion of an increase, would be very bullish for Sterling. As we saw last week in the US where the FOMC minutes suggested there could be an earlier than expected end to monetary easing policies and interest rate increases – the Greenback immediately strengthened right across the board. Whilst we will also see various figures released in both the UK and US on Friday, the crucial variable could come from outside both of these countries. On Thursday and Friday this week we will see crucial data coming out of China, including Chinese; Trade Balance, Consumer Price Index and Producer Price Index. Should these results prove favourable, this would be extremely positive for the global economy and invariably lead to increased optimism globally and consequently a weakening Dollar.
This Morning we saw the release of UK Goods Trade Balance figures that showed there is now a £-9.164B deficit, worse than what markets had been expecting. GBP/EUR did drop off slightly immediately following the release, however the Pound has recovered and is currently trading up for the day at GBP/EUR 1.2282. EU GDP figures for Q4 were released at 10:00 GMT and had little bearing on the markets as they showed that GDP for the region remained at -0.1%. EUR/USD is currently trading flat at 1.3067, only marginally above a key level of support at 1.3064.
The BRC (British Retail Consortium) released data early this morning that showed British retail sales suffered a lacklustre performance last month as sales rose by only 0.3%. The total value of goods sold was up 1.5% from December 2011 but given that inflation is currently 2.7%, this suggests that UK stores actually sold less in real terms.
These figures will have done nothing to allay fears that Britain could well be sliding into a dreaded triple dip recession. However, the British Chamber of Commerce rejected such inferences this morning, stating that economic conditions were becoming more favourable within the UK and the economy would grow steadily over the next few years. Such judgments are based on the back of marked improvements that have been seen in business confidence figures towards the tail end of 2012.
In Europe this morning, data coming out of Germany showed that the German Trade Balance worsened in November. Figures showed a drop in exports from the European powerhouse to €14.6B, down from €14.9B for the month before. This has been followed by mixed EU data that showed whilst EU retail Sales for the end of 2012 fell short of market expectations, EU Retail Sales (YoY) figures improved marginally to -2.6% and EU Consumer Confidence rose to -26.5.
Immediately following the data releases earlier this morning, the Euro dropped off slightly against Sterling and the Dollar. However the currency pairs are now trading relatively flat at GBP/EUR 1.2265 and EUR/USD 1.3115. Cable is also trading flat at present at 1.6084, after hitting a key level of resistance at 1.6124 earlier this morning the pair dropped back down to its current level and looks to be heading for the next level of substantial support at 1.6067.
The Euro has retreated today after the European Central Bank kept rates unchanged at 0.75% and slashed its growth forecasts for 2013. Projected Eurozone growth is now expected to range between -0.9% and +0.3% suggesting that it is more than likely that the Eurozone economy will contract next year.
In the UK, the Bank of England as expected kept interest rates at 0.50% and the Bank’s Quantitative Easing Asset Purchase Programme was also maintained at £375bn.
As a result the Pound is up against the Euro by nearly 1 cent and currently trades at 1.2395 (0.8068) and the Euro is down 1 cent against the US Dollar at 1.2980. The Pound trades relatively flat against the US Dollar currently at 1.6090 on the interbank market.
Matthew Porter 15:15 06/12/12
Christmas came early this morning for the UK as GDP figures confirmed, somewhat emphatically, that the UK has officially come out of recession. David Cameron declared yesterday during a lively Prime Minister Questions, at the end of a passionate statement regarding the strengthening UK economy to opposition leader Ed Milliband, that ‘the good news will keep coming’. Despite this statement, even the Prime Minister himself must have been pleasantly surprised this morning when the data was officially released, confirming a UK GDP Q3 increase of 1%, beating market expectations of 0.6%. This positive sentiment was conveyed in the markets as GBP/EUR jumped 35 pips in the ten minutes following the release. A large part of this increase is likely to be due to the effect the Olympics had on the economy as Olympic Games ticket sales helped revive growth. These results, whilst positive, should be considered with cautious optimism. Bank of England Governor Mervyn King commented yesterday that whilst the UK economy continues to recover, it is proceeding to do so at a ‘slow and uncertain’ pace. All of this means that the Bank of England’s Monetary Policy Committee will have a lot to think about when they meet on the 8th November to decide the UK’s monetary policy.
The economic data this morning from the UK contrasts drastically to the consistently negative information that was released yesterday morning in Europe. Between eight and nine AM yesterday nearly ten pieces of individual European economic data was released with each one being negative and failing to meet market expectations. This quite clearly hit the Euro as we saw nearly one cent fall off both EUR/GBP and EUR/USD following the data release. European leaders offered little help for the Euro either, as has come to be expected, following European Central Bank President Mario Draghi’s meeting with German lawmakers. Truth be told little was expected to come from this meeting which was more of a wooing campaign for Mr Draghi who is keen to gain the support of the German public to ensure the countries commitment to the ECB’s bond buying program which is hoped will help sure up the Eurozone.
Yesterday Wednesday 15th saw Greece’s troubles resurface. With Greece facing a deepening recession, the Greek Prime Minister is set to meet with his French, German and Luxemburg counterparts next week to persuade Eurozone leaders to extend the period of austerity from two to four years, essentially planning to reduce the Greek budget deficit by 1.5% of GDP annually compared to the previous agreement of 2.5%. Due to the slower pace of deficit reduction it is believed an additional £20bn of funding would be required to support Greece.
In the UK, yesterday’s jobs figures continued to defy the recession with unemployment down to 8% and the claimant count dropping by 5,900 in July. Minutes released by the Bank of England also confirmed that the Monetary Policy Committee was unanimous in its decision to leave the bank rate unchanged at 0.5% and to maintain its Quantitative Easing Asset Purchase Programme at its current level of £375bn. Unlike in previous meetings, the bank did not hint towards a bias of further rate cuts giving Sterling a further boost. It is expected that the Bank will gauge the impact of the new Funding for Lending Scheme and the completion of its current £50bn extension of QE in November before it makes a decision on more monetary easing. Today, UK retail sales also beat market expectations growing by 2.8% year on year.
The better than expected news from the UK, coupled with the Eurozone’s on-going troubles has pushed GBPEUR higher towards 1.28, currently trading at 1.2793 (EURGBP 0.7817).
Elsewhere the Pound trades between 1.56-1.57 against the US Dollar and the Euro trades at 1.23-1.24 against the US Dollar on the interbank market.
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The Pound has fallen back below 1.28 against the Euro and back below 1.55 against the US Dollar following this morning’s preliminary UK GDP data release. The data showed that the UK economy contracted much more than many economists expected.
In the second quarter UK economic output plummeted, contracting -0.7% quarter on quarter and contracting -0.8% year on year compared to a median forecast of -0.2% QoQ and -0.3% YoY. Whilst factors including the poor weather and the Jubilee bank holidays may have exaggerated the fall in GDP, underlying economic growth is expected to be close to flat or declining over 2012 despite a predicted improvement in the third quarter.
With UK inflation falling back towards the target of 2% (currently at 2.4%) and the economy in contraction, the likelihood of further Quantitative Easing and an even greater prolonged period of low Bank of England interest rates (currently 0.5%)has increased.
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Minutes released today by the Bank of England have revealed that the Bank came close to extending its programme of Quantitative Easing (QE) as four of the nine member Monetary Policy Committee voted to extend QE. Three members including Bank of England governor Mervyn King voted to extend QE by an additional £50bn whilst one member voted for a smaller addition of £25bn. The Bank also considered the merits of cutting the Bank Rate from 0.50% but concluded that a rate cut had no advantages over more QE.
As previously discussed, further QE from the Bank of England continues to pose a risk to Sterling’s value. On release of the minutes at 09:30 the Pound fell back below 1.24 against the Euro hitting a low of 1.2350 and back below 1.57 against the US Dollar hitting a low of 1.5650 before recovering back to 1.5730 against the US Dollar and 1.2385 against the Euro.
The Pound has fallen this morning following the release of the latest UK GDP figures that indicate that the UK slipped back into recession in the first quarter of 2012. According to the Office for National Statistics (ONS) Gross Domestic Product (GDP) fell 0.2% quarter on quarter and was unchanged year on year. The contraction in UK GDP came as a surprise to many analysts who had been expecting a small amount of growth in the region of 0.1% QoQ. Today’s GDP figures are a preliminary estimate based on about 40% of the data that will be used by the ONS to reach the final GDP figure and many will be hoping that the reading could be revised higher at a later date.
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The Pound has appreciated to a 19 month high against the Euro and towards recent highs against the US Dollar following the release of minutes from the Bank of England’s Monetary Policy Committee (MPC) April meeting. The minutes showed that the nine member MPC voted 8-1 in favour of keeping the Bank’s Quantitative Easing Asset Purchase Programme (QE) on hold at its current level of £325bn, with only David Miles voting for a £25bn expansion. At the previous meeting in March, two members David Miles and Adam Posen had voted for a £25bn expansion, the defection of Adam Posen to voting for no change to QE, coupled with yesterday’s higher than expected UK Consumer Price Index inflation data has reined in expectations of further QE from the Bank of England. As previously discussed, aggressive QE from the Bank of England has posed a significant threat to the value of the Pound. As this threat recedes, the Pound has appreciated.
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