How far will Sterling fall...
Week Commencing Monday 15th August 2016
China: Out of the fast lane?
We start this week in China, where economic activity slowed markedly in July. The weaker than expected data on Friday follows a run of poor numbers this month, fuelling hopes that the government will unleash further central bank stimulus this year to meet its ambitious economic growth targets.
China's pace of fixed-asset investment slipped to 8.1 percent in January-July, the weakest growth since December 1999, and down from 9 percent in the January-June period. Analysts had expected it to rise 8.8 percent. Consumption also softened with retail sales growth easing to 10.2 percent after a rise of 10.6 percent the prior month and factory output rose 6.0 percent in July from a year earlier, below the 6.1 percent analysts had expected.
This raft of poor economic data has sparked speculation within the IMF what Chinese economic growth will decelerate to a 5 percent level by 2020. Citing structural problems such as rising corporate debt and excess capacity in Steal and Coal, it seems the future may not be so bright for the world’s second largest economy.
UK: Consumers still spending despite Brexit woes.
Moving to the UK, retail sales showed the value of online and high street sales rose at the fastest pace for six months in the four weeks leading to July.
Total retail sales were 1.9 percent up year on year. On a like-for-like basis, sales increased by 1.1 percent in July, a marked improvement over the 0.5 percent decline in sales recorded last month, as shoppers took advantage of summer promotions and made purchases deferred by disappointing weather in June.
The positive data for the economy follows a series of other downbeat surveys. Activity in the manufacturing, construction and services sectors shrank in July, while a further survey reported that consumer confidence fell steeply after the referendum result.
Despite this, Sterling continues to get hammered as the market absorbs the Bank of Englands QE extension and rate cut. With geo-politics continuing to dominate, it seems that even good news these days is bad news for the Pound!
Japan: Grinding to a halt despite "Abenomics"
Japan's economy grew at a weaker-than-expected rate in the second quarter despite an aggressive spending policy by the government.
Growth in the world's third-largest economy was flat at 0.0 percent quarter-on-quarter, missing economists' predictions for a 0.2 percent expansion in the April-June period as weak exports and a fall in business spending held back activity. On an annualised basis, the economy expanded by a slight 0.2 percent, well off expectations for 0.7 percent growth.
Monday's weak figures come as Japanese officials face growing pressure to deliver and economists increasingly write off Prime Minister Shinzo Abe's stumbling efforts to drive a recovery, dubbed Abenomics. The central bank disappointed markets at its late July meeting when it opted to leave its 80 trillion yen annual bond-buying programme unchanged, amid worries that expanding the scheme could spark volatility in Japan's debt markets.
EUR/USD saw a modest rally last week with a firm break detected from its 1.09 lows. With little in the way of FX data releases during the first half of the week, we expect the market to trade the range. EU CPI and US Philly should be Dollar positive, pointing to a weaker EUR/USD at close.
GBP/USD continued its decline from its monthly high of 1.3480, with initial bias pointing to just below 1.2800. A break of this level will likely force further declines in the weeks ahead, with the next level of technical resistance at 1.2450. On the upside, any move back up to 1.30 will likely be hit by some USD support, with 1.3093 the first level of resistance.
GBP/EUR’s break though 1.16 last week indicates that its current downward trend continues. Further downside moves are expected as the markets continue to absorb the central banks QE and rate cut moves earlier in the month. Both GBP and EUR will continue to trade the geo-political spectrum, with any further Brexit developments likely to significantly impact this pair.
Economic Calander for the Week
We have an interesting week ahead for the UK With CPI, Claimant Count and Retail Sales for July all in the spotlight. We expect Inflation to remain stable at 0.5 percent on the month, with no shifts likely to be felt until the Bank's monetary policy operations have been fully absorbed into the market. The Claimant Count is likely to increase marginally on the month to 9.5k, while Retail Sales should return a 0.4 percent print.
This week the Philadelphia Fed Manufacturing Index remains the highlight, with a positive print forecasted to lift the concerns presented by last months -2.9 print. The FOMC are also expected to release their minutes on Wednesday, with a likely focus on global growth concerns and Brexit. Building Permits and Core CPI are also both worth a watch, with 1.160M and 0.2 percent expected respectively.
We only have CPI to look forward to from the Eurozone on Thursday, with a flat print expected of 0.2 percent. With a relatively quiet week ahead, we expect the Euro to capitalise on global woes and post gains versus most majors (excluding the US Dollar if we see a bullish set of minutes).