UK downsizes, drops out of top 5
The Office of Budget Responsibility (OBR) cut UK GDP forecasts. The 2017 growth forecast was slashed to 1.5% from 2.0% previously, and the 2018 forecast cut to 1.4% from 1.6% previously. The report was particularly pessimistic surrounding UK productivity and annual GDP growth is not expected to reach 2% throughout the next four years. Also acknowledged was the loss of the top 5 slot in the world’s biggest economies, we have been superseded by France.
Weaker growth forecasts effectively tied the Chancellor’s hands when creating the new budget. Highlights include: VAT left unchanged, £44bn pledged to construction of affordable homes, 100% council tax increase on empty homes. The higher rate income tax band rose from £45,000 to £46,350, and the personal allowance (tax-free), rose from £11,500 to £11,850; both increases, however, are in-line with inflation, which presently stands at 3%.
Weak productivity will likely limit Sterling support in the medium term, although measurement of productivity is contentious. Sterling lost ground on release of the economic projections, although it recovered later in the session, breaking above the 1.3300 level against the Dollar for the first time since the beginning of November. The Euro confined the Pound to below the 1.1300 level again.
The dollar index crashed below its 100-day moving average yesterday as the US heads into the Thanksgiving holiday. The lows this month are driven by the Republican pledge to get tax reform done and dusted by Christmas which, as it stands, is starting to seem unlikely as we get ever closer.
Federal Reserve (Fed) chair Yellen submitted her resignation this week, understandably not tempted to accept a demotion to governor – a role she was entitled to hold until 2024, but there is plenty of work to do before she hands over to Jay Powell. We heard from Yellen in a more informal setting this week. She was careful, as always, with her words but it was still striking to hear Yellen say that while “we” expect inflation to rise over the next year or two, “I’m very uncertain about this.” Markets remain very confident about the Fed raising the funds rate to 1.25-1.50% next month, but this leaves a lot of questions unanswered about 2018.
Today’s focus will be other currency movements for any USD price action as US markets are closed for Thanksgiving.
The non-monetary European Central Bank (ECB) policy meeting yesterday demonstrated a dovish tone amongst fellow members as they aim to put on hold any weighty decision on the next move until well into 2018. On the economic data front, the Eurozone consumer confidence indicator strengthened to 0.1 in November, the highest reading since 1985, but was not enough to catch the market’s attention.
With the lack of any real market-moving data, the Euro was exposed to events elsewhere, demonstrating volatility around the 1.1270 mark against the Pound. There was a slightly different story against the Dollar as the single currency showed a gradual strengthening across the day to close at 1.1833.
In the Eurozone today; French, German, and the Eurozone manufacturing and services activity data will give ECB members a good insight as to whether their Dovish outlook currently is justified.
Data To Watch:
07:00 EUR Gross Domestic Product (YoY) (QoQ) (Q3)
08:30 EUR Markit PMI Composite (Nov)
08:30 EUR Markit Services PMI (Nov)
08:30 EUR Markit Manufacturing PMI (Nov)
08:35 EUR ECB’s Praet Speech
09:00 EUR Markit PMI Composite (Nov)
09:00 EUR Markit Services PMI (Nov)
09:00 EUR Markit Manufacturing PMI (Nov)
09:30 GBP Gross Domestic Product (YoY) (QoQ) (Q3)
12:30 EUR ECB Monetary Policy Meeting Accounts