Andy Murrey has won Wimbledon ... what other headline is there? The Pound maybe!

Week Commencing Monday 8th July 2013


This week in Brief



  • Only UK release of note is the Manufacturing Production figure on Tuesday, which is expecting to jump into growth at a rate of 0.5% versus the -0.2% posted last month.

  • In the US, UoM Consumer Sentiment and the FOMC meeting Minutes are the highlights of the week. All releases are expected to be USD positive.

  • In Europe, Mario Draghi’s speeches on the impending crisis in Portugal and Greece as well as youth unemployment are likely to be the main drivers.


Market Themes & Current Events


The Pound fell below the 1.49 mark against the US Dollar on Friday putting the currency perilously close to a three year low, on the back of Mark Carneys comments regarding UK interest rates. Sterling traded as low as 1.4858 during the afternoon session, although it managed to close just above the 1.49’s by the end of play. Mark Carneys slide to the market began with the governor saying interests rates are likely to remain flat for the medium to long term, making forecasters reassess the yield on Sterling denominated assets. This, coupled with US employment data that saw growth of 195,000 in June, gave the dollar much needed momentum.


Moving away from UK interest rates, positive US jobs numbers add to continued speculation that the country will be the first to raise interest rates. The figure was well above economists’ expectations of 165,000 as revisions to both April and Mays data added a further 70,000 jobs to the previous estimates. The unemployment rate remained steady at 7.6% however, reducing the global impact the figures had on markets. The Euro fell nearly a cent against the US Dollar as a result, while Gold (a “tell tell” sign of market sentiment) fell almost 3 percent. Interestingly, if the US continues to see job creation at this rate, the unemployment rate should fall from its current 7.6% to 6.5% by the end of 2014. This is the number the Federal Reserve has said the US jobs market must reach before it will consider ending its low interest rate policy. Will the US be the first country to start raising interest rates? They certainly seem to be progressing along the growth path fast enough for us to adjust our medium term projections.


Back in the UK, The services sector, which accounts for roughly 75% of UK economic output, grew at its fastest rate for more than two years in June. The Markit/CIPS Services Purchasing Managers' Index (PMI) for the UK rose to 56.9 in June, from 54.9 in May. The figures followed encouraging news from both the manufacturing sector and surprisingly, the construction sector. Manufacturing PMI posted the strongest monthly growth for two years, whilst construction saw a second months’ worth of growth. There is no doubt that these are very strong figures for the UK, and it continues to push up our and the market future GDP projections closer to the 0.5% - 1% q/q mark. However, with real wages falling and growth at least in part driven by consumer spending, how long can it be kept up or is growth really here to stay?   


In Europe, Portugal's Prime Minister, Pedro Passos Coelho has presented the president with what he calls an agreed "deal" to keep his coalition alive. The PM says his right leaning governing partner pledged to keep supporting his government after two resignations plunged it into crisis. The uncertainty had sent the interest rate on Portuguese 10-year bonds above the 8% danger line, before falling back to 6.8%. This comes as the country struggles to abide by bailout conditions set on the country after it received more than 78 Billion Euros in funds. Despite the political consensus, Portugal has been in recession for two years and the economy is expected to contract by 2.3% this year. This is going to make further austerity difficult for the already unpopular government, and could have the potential to reignite the whole European sovereign debt crisis if it were to spread to Spain and others. Germanys Wolfgang Schaeuble does not expect this to happen, but let us hope he keeps his cheque book close just in case!


Sterling Outlook


We have a very light week ahead for Sterling, with Manufacturing Production the highlight of the week. This release is expected to follow last week’s strong PMI figure in depicting a strong overall improvement in the manufacturing sector. With this in mind, the markets expect a rise back into positive growth of 0.5% from -0.2% in April. We must note however that this release has a tendency to encompass big swings, so we only expect a vastly positive or negative shift away from expectation to cause volatility in Sterling markets.


Sterling is holding its own (to an extent) against the Euro whilst woefully collapsing against the US Dollar. We doubt that the Pound can continue to give way against the Dollar however, especially in the wake of such strong PMI data last week. We therefore expect a rebound in GBP/USD, potentially back above the 1.50 mark, especially in the absence of any data releases from the UK. The Euro could see some losses from the Draghi speeches early on in the week, and a return to the 1.17’s on GBP/EUR is certainly a distinct possibility.  


US Dollar Outlook


Mush like the UK, the US has a relatively quiet week ahead, with the FOMC Meeting Minutes and the Preliminary University of Michigan index proving to be the highlight. We start with the FOMC Minutes, which should be extremely interesting reading as they originate from a crucial meetings where Ben Bernanke set of a extremely positive outlook for US growth, whilst making his first intimation that the Fed may taper rates within 2013. The interest in this report will come from whether these views are reciprocated within the FOMC.


Also on Wednesday, Ben Bernanke is expected to deliver a speech at the NBERC, which is likely to surround the historical aspects of central banking. We do not expect any market moving information from the Federal Reserve chief, but will be watching for any additional hints on policy change during his Q&A session.


Moving to Friday we await the University of Michigan Consumer Sentiment figure. We expect this preliminary figure to rise from 84.1 to 858.3, which puts the index at its highest levels since the economic crisis began in 2007.  


Euro Outlook


The Eurozone is back in focus after concerns over Portugal and Greece continue to hit the global headlines. Following on from this, Mario Draghi has two scheduled speeches on Monday, which we will follow in detail to ascertain any potential to shift market direction. Draghi has a tendency to talk down markets and the value of the single currency without actually implementing any measures, and we do not see why this will instance will be any different. Importantly, any further indications regarding whether the ECB will aim to target specific areas such as unemployment would be crucial in gauging how the ECB is measuring the need for low interest rates.

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