Sterling slacks as UK economy slumps
According to the first estimate, UK GDP declined 0.2% for the second quarter compared with expectations of an unchanged reading. This was the first quarterly decline since 2012 with a sharp dip in inventories and output following the artificial Brexit-related strength for the first quarter. Annual growth slowed to 1.2% from 1.8% previously. Industrial production data was also weaker than expected with a year-on-year decline of 0.6% with output declining 1.4% for the quarter.
There was a further shift in interest rate expectations following the data with markets more confident that the Bank of England would cut rates before the end of 2019. This coupled with political fears continued to unsettle Sterling with fears over a disorderly Brexit and further speculation over an early General election.
UK confidence continued to deteriorate with the Euro strengthening to a 9- year high above 1.0752 while the UK currency dipped to 34-month lows below 1.2050 against the US dollar. CFTC data registered a further increase in short, speculative positions to the highest level since April 2017, maintaining the risk of a sharp correction if there are any positive developments, but Sterling remained firmly on the defensive this morning.
US producer prices data came in slightly below consensus forecasts with the annual increase held at 1.7%, although there was no significant market impact. President Trump maintained his attack on the Federal Reserve with a call for an interest rate cut of a full percentage point. Market expectations of further rate cuts increased amid concerns over further damage to the US economy. Trump also stated that he wouldn’t devalue the dollar which provided only slight relief for the US currency.
The Euro against the Dollar consolidated near 1.1200 as narrow ranges prevailed and both currencies unable to gain sustained support.
The weaker than expected German trade data maintained concerns over the outlook and limited potential Euro support, especially with increased concerns over the Italian political outlook. The concerns are mainly focused around the possibility of early elections with increased pressure for parliament to be recalled for a confidence vote.
The Euro, from Tuesday onwards last week, traded very much within a range of 1.1170 to 1.1240 against the Dollar and currently finds itself towards that lower end this morning. No news releases to start the week but tomorrow sees German ZEW Economic Sentiment and Prelim GDP figures on Wednesday.