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MORE CUTS TO UK GROWTH FORECAST

MORE CUTS TO UK GROWTH FORECAST

Sterling changed little yesterday as we continue with a slow week following major market movements last Friday. GBP traded relatively flat against other major currencies and dropped a slight 40 pips against the US Dollar and Euro.

The British Chambers of Commerce lowered their growth forecast for the three years from 2015 and noted that growth was impacted by “persistently weak trade performance and current account balance”. It added that “premature interest rate increases” are “unnecessary and too risky” as recovery is still fragile with global uncertainties. The institution holds the opinion that Bank of England liftoff should be delayed beyond Q3 next year.

The UK current account to GDP ratio has hit record lows for three consecutive years and could post another record low this year. The markets have ignored this for the last three years. However, the trade side weakness is reaching an alarming level as discussed here and the issue could gain attention this year, which would be bearish for Sterling. Also released was the  National Institute of Economic and Social Research (NIESR) data concerning GDP growth over the last three months.

US JOLTS job openings fell 151k in October, following September’s 157k rebound (revised from 149k), causing the rate to dip to 3.6% from 3.7%. Hiring rose 57k after declining 1k previously (revised from -32k). The rate was unchanged at 3.6% (September was revised up from 3.5%). Quitters rebounded 52k in September after falling 44k previously (revised from -51k). The quit rate was steady at 1.9%. The data is on the old side and won’t impact the Federal Open Market Committee, especially as the November jobs data revealed a solid round of numbers.

Versus Sterling, the Dollar appreciated to 1.4955 but struggled to push past the resistance level, then settled back to around the 1.50 mark. Against the Euro, the Dollar actually lost some ground slipping into 1.09 territory following German trade surplus data for October coming in at 20.8Bn Euros against the 20Bn forecasted initially. This weakness is likely to be short-lived as Janet Yellen and the Fed seem to still be on course for a rate hike next week as the economic data seems to support a hike.  However, Yellen’s rhetoric has changed recently.

In China, a year of stimulus, interest rate cuts and most recently devaluations to its currency is finally having the desired effect on inflation as CPI data came in at 1.5% – slightly higher than the 1.4% expected. The Chinese still face widespread deflationary pressures for producers who continue to see prices tumble with PPI coming in as expected at -5.9%, but for consumers the stimulus measures have had a greater impact – prices are rising.

However, for the People’s Bank of China inflation is still running well below target meaning there is plenty of room remaining for further stimulus measures. Ever since the Yuan was added to the IMF’s reserve currency basket we’ve seen the fixing rate lowered for the last four days in a row and we’re likely to see a continuation of the Renminbi’s devaluation.

Data to watch: 7am EUR German Current Account, Exports, Imports & Trade Balance. 3pm US Wholesale Inventories.

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