Not quite Super Thursday!
Week Commencing Monday 10th August 2015
Overriding Market Themes
We start this week with news that the US economy has added 215,000 new jobs in July, while the unemployment rate held steady at its seven year low of 5.3 percent. Monthly job growth has averaged just over 211,000 so far this year, a level suggesting that employers and businesses are confident the economy will continue to expand and require more workers to facilitate their growth programs. The government also said employers added a total of 14,000 more jobs in May and June than previously estimated. The release was viewed by the market as crucially important, given its impact on any potential change in the Federal Reserve’s interest rate agenda. The Fed has held its key short-term interest rates near zero since the financial crisis of 2008 in an attempt to try and boost borrowing, investing and spending. Given the recent spate of good news, the Fed appears to be closer than ever to concluding that the economy is strong enough to withstand higher rates.
That said, many still believe that the recovery has not taken hold sufficiently to entertain a rate rise. The economy’s overall growth rate has remained lacklustre at an annualized pace of 1.5 percent in the first of half the year, and pay raises have been sluggish, with average hourly earnings in July up just 2.1 percent from a year earlier. Despite this, most economists and financial pundits still believe that a rate rise is on the cards either late Q3 or beginning of Q4 2015. Interesting times lie ahead for the economy, and the Dollar! What will happen, watch this space!
Back in the UK, the Pound dived on the back of the so-called Super Thursday event, where the Bank of England voted to maintain rates at current levels by 8-1. The voting pattern pushed the possibility of the first rate rise for more than five years from the current 0.5% low back into early 2016, according to most analysts. Only Ian McCafferty, the long standing hawk on the committee voted for an immediate rate rise, leaving the doves well in the majority. During the press conference, Mark Carney also said that he expected inflation to be back to its 2 percent target in two years’ time, in line with its previous forecast in May, despite a renewed drop in oil prices and a strengthening of Sterling in the last quarter.
In terms of forecasting, the Bank of England did release some positive news. According to their assessment, the economy will grow 2.8 percent in 2015, a level slightly higher than previously anticipated, and 2.6 percent next year. Wages will also rise faster this year than forecast in May, at a rate of 3 percent, and increase 3.75 percent in 2016.
GBP This Week
GBP was a notable underperformer last week after Super Thursday saw the MPC indicate a slightly less than hawkish economic outlook, pushing back the approximate timing of rate rises. Sterling struggled to maintain its position in the 1.40’s versus the Euro, which the US Dollar made some significant gains back into the 1.54’s. The apparent dovishness of the bank does reinforce our assessment that any Sterling appreciation versus the EUR is likely to be gradual, while the USD should still hold the cards given the now somewhat diverging interest rate paths.
In terms of data, a swath of UK labour market releases on Wednesday should confirm unemployment steady at 5.6 percent. Average weekly earnings growth may however slow to 2.9 percent versus 3.2 percent on a reduction of expected bonus levels. Interestingly, the claimant count may well see an unusual gain for July, with an increase of a mere 3,000 expected.
All in all, Sterling had a knock last week but should have sufficient leverage to offer some resistance versus a powerful US Dollar. I would also expect Sterling to recover some of its losses versus the Euro, potentially resettling in the 1.4250 level by the end of play.
USD This Week
Data wise we have a quiet week for the US, with Retail Sales on Thursday headlining. We expect the index to confirm 0.6 percent and 0.4 percent respectively on both the headline and core figures, in line with market expectations. Moving to Friday we expect industrial production coupled with the Michigan consumer sentiment report, where we expect prints of 0.4 percent and 94.0 respectively. These are on the bullish side of expectations, however given the recent numbers seen from across the pond, we believe the economy has the necessary power to push through these figures.
Given the expectations of decent prints, we expect the Dollar to continue to outperform its peers this week. With this in mind, expect Sterling to put up a fight and remain reasonably flat, with risk pointing to the downside however. EUR/USD should also continue to point south, with perhaps a 1 – 2 cent move on the cards should the ECB meeting be particularly negative.
EUR This Week
We have a light week ahead for Europe, with the ECB July meeting minutes the only release of note. As always, any mention of Greece will likely be top of the economic reading list, especially given the upcoming 20th August EUR 3.2 billion payments due to the ECB being due this month.
The Euro has had a rough ride of late, only managing to muster some strength versus Sterling after the dovish Bank of England release. We believe that this strength will be short-lived however, so expect some further losses against its major peers as we progress towards the middle of the month.