Headlines
• UK YoY Q2 GDP revised lower –
Quarterly growth confirmed at 0.7%.
• Sterling survives as deficit shrinks –
UK living standards hit five-year high.
• Euro down on disinflation print –
GBP/EUR up 70 pips.
• ‘Cable’ close to five-month low –
ADP labour numbers boost ‘Greenback’.
Sterling
Surprisingly, it was reported yesterday that annualised UK second quarter growth was a little bit weaker than initially estimated. The Office for National Statistics (ONS) confirmed that the British economy grew at a quarterly rate of 0.7% but revised down the yearly figure from 2.6% to 2.4%. However, the Pound did not suffer any serious losses following the result because other elements of the report were more encouraging. Living standards, for example, rose at a rate of 3.7%, which was the fastest score for over five years – most probably a reflection on the recent spate of soft price rises and decent wage increases. The current account deficit also improved, falling sharply from a record 5.1% to a two-year low of 3.6%.
If Sterling is to stage a recovery tomorrow it will need Markit’s September manufacturing PMI report to print higher than analysts’ expectations of 51.8. The factory output index came in at 52.2 last time out.
Euro
Deflation Alert! The Pound to Euro exchange rate broke a seven-day losing streak yesterday by registering a 70-pip daily gain in response to lower-than-anticipated inflation figures out of the Eurozone.
Eurostat reported that consumer prices shrunk from +0.1% to -0.1% in September, which undershot the median market consensus of 0.0%. Drops in prices at the petrol pump, due to the latest leg of the commodity crisis, contributed strongly to the disinflationary print and subsequently investors sold the single currency to hedge against the prospect of further easing from the European Central Bank.
ECB President Mario Draghi is on the record as saying that the central bank is considering expanding its quantitative easing scheme to help boost liquidity in the region and drive CPI back towards the 2.0% target. However, Draghi’s most recent remarks suggest that it will take a sharper drop than -0.1% before policymakers actually opt to bolster the asset purchasing scheme.
US Dollar
Sterling tumbled for the tenth consecutive full trading day (not including Sunday evenings when markets are open for a few hours in Asia) yesterday to reach a fresh near-five-month low.
‘Cable’ sunk through technical support to register a -30 pip daily decline on the back of a stronger-than-expected American labour market report. The ADP employment change index, which is the little, less reliable, brother to Friday’s headline US non-farm payroll report beat projections of 190,000 with a sturdy score of 200,000. Although the ADP print generally shares a fairly weak correlation with the NFP numbers markets are often moved by the report nonetheless.
There was potential for further gains for the ‘Greenback’ during the evening but Federal Reserve President Janet Yellen chose not to comment on policy during a speech in St Louis.
Canadian Dollar
Sterling depreciated by around two cents to strike a three-week low against the Canadian Dollar yesterday as markets reacted positively to a robust Canadian GDP report.
Beating forecasts of 0.2%, the monthly growth score came in at 0.3%, whilst the yearly figure came in at 0.8%, improving on economists’ predictions of 0.7%. The sanguine figures bolstered demand for the ‘Loonie’ as traders reduced bets of further monetary easing from the Bank of Canada before the end of the year.
Australian Dollar
The Pound to Australian Dollar exchange rate remained fairly flat yesterday as risk sentiment was capped by global growth fears. Indeed, it was reported that US$11 billion was wiped off the global stock market in the third quarter in the worst quarterly performance since the middle of the Eurozone debt crisis in 2011. The ‘Aussie’ Dollar avoided losing ground, however, because traders down under were buoyed by the disinflationary Eurozone CPI print, which they saw as increasing the chances of enhanced QE from the ECB.
The Sterling to ‘Aussie’ Dollar exchange rate fell during the Australasian session in response to a slightly better-than-anticipated Chinese manufacturing PMI result of 49.8.
New Zealand Dollar
Sterling slid to a five-week low versus the New Zealand Dollar yesterday as investors bought into the ‘Kiwi following the first rise in New Zealand business confidence for six months. The impact of higher dairy prices also reflected well on the commodity-linked Antipodean currency.
The ‘Kiwi’ rallied against the Pound during the Asian session thanks to a Chinese PMI score of 49.8, which beat estimates of 49.7.
Data Released Today
9:30 GBP Markit UK PMI Manufacturing s.a. (SEP) Medium 51.3
15:00 USD ISM Manufacturing (SEP) High 50.6