Weak data hammering Sterling
The Pound continued to surrender ground yesterday after further disappointment over the latest GDP data which suggested a slower than expected recovery. The Office of Budget Responsibility forecasted GDP would contract by 12.4% in 2020 with the budget deficit expected to be 16% of GDP. Low confidence in medium-term economic fundamentals continued to undermine Sterling support. There were also some concerns that the policy reversal and decision to ban Huawei from the 5G network would have negative political and economic consequences.
NIESR forecasts that the June data will see a more substantial economic recovery at 7.8%, up from 1.8% in May and the 3-month measure will show a sharp improvement for the July data. Sterling dipped to near 1.2500 against the Dollar before recovering to 1.2550 as the Dollar weakened. The Euro posted strong gains to the 1.0990 area before a limited correction to 1.1030 as gains in equities provided some Sterling relief. The CPI inflation rate increased to 0.6% from 0.4% and above expectations of 0.5% with the core rate at 1.4% from 1.2%. Sterling edged higher to 1.2580 as a weak Dollar and equity market gains provided support.
The US NFIB small business confidence index strengthened to 100.6 for June from 94.4 previously. Consumer prices increased 0.6% for June following a 0.1% decline previously and slightly above consensus forecasts of 0.5%. Core prices increased 0.2% on the month, in line with expectations and the annual rate held at 1.2%.
Federal Reserve (Fed) Governor Brainard stated that monetary policy will have to shift from stabilisation to accommodation with downside risks predominant for the economy while the Fed needed to be attentive to the risk of lower inflation expectations. She again ruled out negative interest rates, but called for substantial asset purchases. Dallas Fed President Kaplan stating that there is a pronounced economic slowing again. There were strong expectations of a very supportive Fed monetary policy.
The dollar was unable to make any headway even when equities struggled. The maintained a weak tone continued this morning trading against the Euro at 1.1425.
The German ZEW economic sentiment index retreated slightly to 59.3 for July from 63.4 previously and below consensus forecasts of 60.0. There was an improvement in the current conditions index to -80.9 from -83.1, but still well below market expectations. Euro-zone industrial production also increased to 12.4% for May following April’s 28.7% slide with the year-on-year decline at 20.9% from 28.7% previously.
The common currency drifted lower following yesterday’s data, but did rise and pushed above the 1.14 mark before retreating slightly to the 1.1390 area. German Chancellor Merkel has also insisted the agreement on the EU recovery fund is urgent, increasing pressure for a deal to be reached at this week’s Summit starting on Friday.
As of writing, the Euro is trading around 1.1400 against the Dollar.
Data to watch
06:00 – GBP – CPI
13:15 – USD – Industrial Production
14:30 – USD – Crude Oil Inventories