UK GDP boost fades as traders scared to hold the Pound
The UK’s first post-Brexit GDP Quarter 3 data exceeded markets’ expectations and posted a reading of 0.5% growth, mainly due to service sector performance. The Bank of England’s latest forecast had assumed 0.3% growth for the quarter. As a consequence of the reading there will be a further upward adjustment to forecasts. This will lessen the potential for another near-term interest rate cut, especially with the CBI Distributive Trades Survey showing that October saw the strongest pace of growth since September 2015.
The annualised GDP data also beat expectations growing at 2.3% compared with the anticipated 2.1%. Following this, the UK’s finance minister Philip Hammond stated that the result of these figures proved that the fundamentals of the UK economy are strong and resilient.
Sterling strengthened immediately after the data due to the shift in interest rate expectations and there was a sharp increase in bond yields. The Pound was unable to break above 1.2250 against the Dollar and 1.1230 against the Euro. By the afternoon Sterling suffered significant pressure with some evidence of month-end selling, causing the currency to weaken.
Volatility will remain a threat on Friday given the raft of US data releases and month-end position movements. The dip in consumer confidence suggests Sterling weakness may have unsettled consumers to some extent.
US Durable Goods data fell by 0.1%, but excluding the transport element, the same data showed an increase of 0.2%. Pending home sales data just beat expectations while the jobless claims fell, maintaining confidence in the US jobs market.
The US GDP data is liable to spark further volatility today, especially with position adjustments ahead of next week’s NonFarm payrolls and Fed interest rate decision, and the forthcoming Presidential Election on November 8th. Markets now believe that there is a 78% chance of an increase in Fed funds rates by the end of 2016, increasing the risk of a correction causing Dollar selling, if the GDP data is disappointing.
This afternoon, the Euro is likely to be influenced by the German CPI and Spanish GDP data. The main focus is on the preliminary German CPI release, which is expected to show the cost of living accelerated in October.
Data to watch: 1pm Euro Oct Consumer Price Index, and Harmonised CPI. 1.30pm US Q3 GDP, Q3 Personal Consumption Expenditures & Core PCE.