Will GDP data weigh heavy on Sterling?
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The euro enjoyed a three-week high, but reversed some of its gains on Friday after the upbeat release of the preliminary readings of UK Q2 GDP which came in better than expected on QoQ. The monthly GDP also rose for June. Dovish ECB concerns have also weighed on the euro.
Last week the euro strengthened due to rising German yields. The 10-year Bond yield stands at 2.54%, while the 2-year yield is at 3.17% and the 5-year yielding 2.59%, showing more than 1% increases. The European Central Bank (ECB) expectations remain steady, but markets continue to have low expectations for a September hike. It will all depend on the incoming data the bank receives.
The European Central Bank’s (ECB) monthly Economic Bulletin showed a highly uncertain outlook for the bloc’s economic growth and inflation, as well as deterioration in the near-term economic outlook. The latest Reuters poll about the European Central Bank (ECB) shows that a small majority is expecting a pause to the rate hiking cycle, while some economists expect another rate increase.
UK’s leading think tank National Institute of Economic and Social Research (NIESR) has indicated in its early week forecasts the prospect of higher rates and a hawkish Bank of England, which in turn has supported the GBP/EUR.
In terms of economic data, for the UK we note the following: on Tuesday we get employment data for June, on Wednesday, CPI rates for July and on Friday, retail sales rate for July. From the Eurozone, we note the ZEW economic sentiment figure for August due out on Tuesday. On Wednesday, we get the Eurozone’s revised GDP estimate for Q2 and industrial production rate for June. Finally, on Friday, we have the Eurozone’s final HICP rate for July.
Expected Volatility – Medium
Recent doubts about the ECB’s future rate hikes may push the cross-currency pair higher. The release of employment and inflation data from the UK will be closely watched.
Following the positive UK GDP numbers, the GBP/USD traded in positive territory in the European morning on Friday. The data from the UK showed that the GDP expanded at an annual rate of 0.4% in the second quarter, better than the market expectation of 0.2%.
Both GDP and UK factory data grew stronger than expectations helping the GBP/USD pair rebound significantly. The factory data showed optimism among producers despite persistently high inflation and tight monetary policy conditions. The stronger-than-expected GDP growth suggests that the economy is resilient enough to avoid recession. The robust economic growth will allow the Bank of England to raise interest rates further.
In the US, the mixed commentary by Fed officials has confused investors, that is why when on Wednesday the Fed releases its July meeting minutes, market participants may have a clearer idea of the bank’s intentions. Last Thursday’s US CPI rates indicated an easing of inflationary pressures which may soften the Fed’s aggressiveness in terms of hiking interest rates further.
Investors are worried that China could retaliate against a ban on US investment in Chinese industries which was announced last Wednesday. President Joe Biden imposed limits on US investments in China in an attempt to limit the country’s ability to develop next-generation military and surveillance technologies that could threaten US national security. A spokesperson of the European (EU) Commission said that they are in close contact with the US administration and are ready to cooperate on the topic, while the Financial Times (FT) suggested that UK Prime Minister (PM) Rishi Sunak will also follow the US in restricting investment to China technology companies.
On Friday, the Producer Price Index (PPI) for final demand in the US increased 0.8% on a yearly basis in July, coming in slightly higher than the market expectation of 0.7%. The US Dollar Index rose slightly higher after this release.
In terms of economic data from the US, we note Tuesday’s retail sales rate for July, Wednesday’s industrial production rate for July, and Thursday’s weekly initial jobless claims figure and the
Philly Fed Business index figure for August.
Expected Volatility – Medium
After positive GDP growth, investors and analysts will turn their attention to Tuesday’s upcoming release of the UK’s labour market data, due out at 06:00 GMT.
EUR/USD rose to its highest level in two weeks on Thursday but failed to maintain momentum.
The release of the Consumer Price Index (CPI) showed that inflation in the US rose higher to 3.2% on a yearly basis in July from 3% in June. Monthly CPI and Core CPI rose 0.2%, the same as June’s figures and in line with market expectations. While the release weakened the greenback, the cautious market mood erased any gains for the EUR/USD.
Expected Volatility – Medium
The recent re-pricing of growth and rate expectations in the Eurozone has weighed on the pair, but if there are signs the US economy is slowing down, then the euro could find support.
New Zealand Dollar (NZD)
The RBA remained on hold at 4.10% last Tuesday, as Governor Lowe said that they need more time to assess the impact higher interest rates have on the economy. The decision was seen as dovish and weighed on the Aussie. The market expects the bank to remain on hold until the end of the year. Australia’s trade surplus narrowed less than expected but import and export growth rates contracted. Economic recovery in China is facing challenges as the NBS and the Caixin manufacturing PMI figures for July showed that economic activity contracted. On Tuesday, when we get China’s trade data for July, market participants will get a clearer image of how the Chinese economy is faring.
Japanese Yen (JPY)
Former Japanese Prime Minister Taro Aso’s remarks during a Taiwan trip, advocating preparedness for conflict, have been condemned by China. Bank of Japan (BoJ) released a summary of opinions for July, affirming the need for continued monetary easing to achieve price stability. BoJ’s commitment to ultra-loose monetary policy suggests a delay in potential interest rate hikes. Japanese household spending accelerated on a month-over-month (mom) basis by 0.9%, contrary to an expected decline of -1.1%. Despite overseas interest rate pressures, Japan’s current account data for June indicates resilience in the economy.
Upcoming releases include Monday’s preliminary GDP rate for Q2, Thursday’s machine orders rates for June and trade balance figure for July, and Friday’s CPI rates for July.
Norwegian Krone (NOK)
The Norwegian Krone strengthened in the past month as investor concerns about the global economy have eased. With market optimism and higher commodity prices, the NOK found support. The Krone has also been supported by the Norges Bank’s decision to tighten policy more to tackle elevated inflation. This is why we highlight Norway’s interest rate decision on Thursday during the European session. Norwegian inflation in July came in line with Norges Bank’s expectations. Economists expect the Krone to strengthen if upcoming data is upbeat.