Strong U.K. data causes sterling to rise and increases the November interest rate rise bets, German data also beats forecasts, helping to push the euro to weekly highs

Oct 11 • Morning Roll Call • 44 Views • No Comments

After beating the forecasts on industrial production on Monday, coming in at 2.6% growth MoM for August versus the expectations of 0.9%, Germany continued its robust growth figures; export and import figures also smashed through the forecasts when the data was published on Tuesday. Exports rose by 3.1% MoM for August and imports rose by 1.2%. This classic, orthodox, text book, growth paradigm and example of how a healthy economy works, helped to increase the country’s trade balance and current account surpluses. As a consequence of the data the euro rallied versus its main peers, EUR/USD rising by circa 1% on the day. The rally was maintained by the president of Catalonia declaring that the referendum vote in which 90% of voters chose secession (although accepted) would not be enacted, the independence result would be suspended, in preference to negotiations with Madrid.

The U.K. economy also published encouraging growth data on Tuesday helping cable (GBP/USD) to rally; industrial and manufacturing production and construction output, all beat forecasts. However, the U.K. differs in comparison to Germany’s text book economic example, as it currently runs deficits and the various trade balances worsened in August. Britain’s visible trade in goods deficit with the rest of the world hit a record high in the month. The gap between what the U.K. bought and sold widened to -£14.245b in August, according to the Office for National Statistics, whilst the overall UK total trade balance deficit widened to -£5.626b, the highest reading in twelve months. Outside of calendar news U.K. employment suffered a blow with the news that BAE will cut circa 2,000 jobs, coming the week after Monarch airline collapsed, causing 3,500 job losses.

The International Monetary Fund stated on Tuesday that the global economy recovery may fade, despite a pickup in activity in all western countries, with the exception of the U.K. The IMF said there are risks that governments may encourage a false sense of security due to booming markets, they warned policymakers to guard against complacency. In its half-yearly World Economic Outlook (WEO) they predicted global output rising from 3.2% in 2016, to 3.6% in 2017 and 3.7% in 2018, upgrading their growth forecast by 0.1%, for this year and next.

EURO

The single bloc’s currency rose versus the majority of its main peers on Tuesday, as the encouraging German data and the suspension of the Catalonia referendum result, buoyed investors. EUR/USD rose by over 1% and breached R3, to end the day at circa 1.1812. EUR/JPY, EUR/CAD, EUR/NZD and EUR/AUD all rose through R2 and closed out up circa 0.5% on the day. EUR/GBP ended the day close to flat at 0.8944, resting close to the daily pivot point.

U.S.DOLLAR

The dollar fell versus the majority of its peers during Tuesday’s trading sessions, as USA equity markets continued to reach record highs. There was no particular data or news that caused the USD sell off, other than the persistent belief that Trump’s administration may fail to push through its tax cuts agenda and that (as a consequence), interest rate rises may not be as aggressive as previously predicted. The FOMC minutes, which will be published on Wednesday evening, may also prove to be less hawkish than previously thought. USD/JPY breached S3 in the morning European session, to eventually recover to S1 in the New York session, ending down circa 0.3% on the day at 112.40. USD/CHF fell by approx. 0.8% on the day, ending close to S3 at 0.9747.

STERLING

Sterling investors appeared to be ignoring negative news on Tuesday, such as; the OBR (Office of Budget Responsibility) revising down the U.K. production growth to 0.2%, from 2.6%, the Brexit political turmoil reigniting and questions over May’s leadership resurfacing. Instead GBP investors were encouraged by and concentrated their collective minds on the latest U.K. ONS data, appearing to be strong enough to support the BoE/MPC suggested rate rises. Apparently the “money markets” are now pricing in a 70% possibility of a rate rise announcement at the November 2nd meeting. GBP/USD rose by approx. 0.4% to 1.3207 and versus: CHF, AUD, NZD and JPY, sterling rose by approx 0.2% on the day.

EQUITY AND COMMODITY PRICES FOR OCTOBER 10th.

• DJIA closed up 0.31%
• SPX closed up 0.23%
• FTSE 100 closed up 0.40%
• DAX closed down 0.21%
• CAC closed down 0.04%
• IBEX closed down 0.92%
• The MSCI All-Country World Index rose 0.4%.

KEY ECONOMIC DATA FOR OCTOBER 11th.

• USD MBA Mortgage Applications (OCT 06).

• USD JOLTS Job Openings (AUG).

• USD FOMC Meeting Minutes (SEP 20).

• NZD REINZ House Sales (YoY) (SEP).

• GBP RICS House Price Balance (SEP).

• JPY Bank Lending incl Trusts (YoY) (SEP).

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