Postitve UK Inflation data and the week ahead...

Week Commencing Monday 31st October 2016

 

UK: GDP continues to defy Brexit blues

UK gross domestic product beat estimates, with the economy growing by 0.5 percent during the third quarter of the year.

This beat analysts expectations of the 0.3 percent print and was considerably better than the -0.1 percent the Treasury had projected. Diving into the figures, the services sector, which makes up nearly 80 percent of the UK economy, was responsible for all of the third-quarter growth, expanding 0.8 percent.

The three other major sectors within the economy (industrial production, construction and agriculture) all contracted. The strength of services continues the pattern since the financial crisis, with output 12.1 percent higher than its pre-crisis peak. In contrast, manufacturing is still 5.6 per cent smaller than at the start of 2008 and construction 1.3 per cent lower. It is important to note to that despite the great print, this number is subject to change.

The current figure was based on only 44 percent of the data required for the final estimate, and the number could be quite different later this year when the final figure is confirmed.

CETA: Finally Ceta is off the ground, lessons for Brexit anyone?

The EU and Canada signed a free trade deal on Sunday that was almost scuppered by a regional Belgium town, exposing the difficulties of securing agreement from the 18 member bloc.

The Canadian Prime Minister and top EU officials signed the comprehensive economic and trade agreement, known as Ceta, paving the way for most import duties to be removed early next year.

The treaty does still need to be approved by at least 38 national and regional parliaments, including the UK parliament, in order to take effect. Liam Fox, the international trade secretary has warned that the UK parliament could still veto the deal and has also warned that problems in agreeing Ceta showed the difficulty the UK could face in negotiating a trade agreement with the EU.

Unlike Brexit, both the EU and Canada approached the negotiations with goodwill, something which is unlikely in the Brexit negotiations.

BoE: Don't leave me now Carney!

Markets are becoming increasingly hopeful that Mark Carney, Governor of the Bank of England, is ready to confirm that he will extend his term at the Bank of England beyond 2018.

Sources close to the Governor have said he is likely to make a statement on his future this week to put an end to damaging speculation. It is thought that pressure exerted on the bank chief from prominent “Brexiteers” is partly to blame for the speculation, with some MP’s openly calling for his resignation.

This Thursday’s Bank of England news conference will therefore be watches closely and any indication that he is ready to throw in the towel will certainly send Sterling lower. Interesting time ahead!

 

FX Forecast

EUR/USD has recovered from its 1.0850 lows however the outlook remains unchanged, especially in the geopolitical context. With this in mind, we expect bais to remain to the downside with a floor of 1.0775 likely to represent the low of the week. Ceta news should support early trading, however the FOMC coupled with US employment data should prompt USD strength towards the mid to end of the week.

GBP/USD remains range bound subject to Brexit news, with the rate hovering between 1.21 and 1.23 last week. Any news of Carney’s quitting the Bank of England will certainly cause Sterling markets to panic, with a new range in the teen’s likely. Bias remains to the downside, however if we see a decent set of PMI prints we could see the trend reverse and the rate edge back up into the 1.23’s.

With GBP/EUR approaching the 1.10 barrier we expect a range bound week, with upside potential on the back of some decent UK PMI prints. There is significant support at 1.13 and this would be hard for a bullish Sterling to break, therefore expect the pair to trade within this range.

 

Economic Calander for the Week

UK Data:

We have a busy week for the UK with the all important PMI’s set to be released this week. Starting with Manufacturing, we expect a slight downside shift in the level from 55.4 to 54.5, indicating the sector remains in growth albeit growing slower. Construction is also expected to grow with the indicator coming in at 51.8 versus last months 52.3 print. Services is the big one, with a 52.4 print expected this month versus last months 52.6. Finally we are awaiting the Bank of England’s interest rate decision and minutes on Thursday, which should give markets a decent insight into the bank’s current Brexit sentiment.

US Data:

It is a big week for the US with ISM Manufacturing kicking off the news on Tuesday. We expect a slight upside revision in the index, with a print of 51.7 expected against last months 51.5. The FOMC statement is expected on Wednesday and we expect it to be more hawkish than ever, which should give the Dollar bulls a further reason to buy. ISM Non-Manufacturing on Thursday is likely to be the only disappointment, with a downside print of 56.0 versus last months 57.1. Finally, Nonfarms should show an improvement in the number of payrolls and unemployment could drop from 5.0 percent to 4.9 percent on Friday.

EU Data:

We have a quiet week for the Eurozone with Monday’s CPI figures the only economic release of note. We expect CPI to be confirmed in at a healthy 0.5 percent on the month, with Core CPI coming in around 0.8 percent. Eurozone GDP is also due on Monday and should be confirmed in at 0.3 percent for the quarter.

 

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