Scottish independence polls give Sterling a headache

Week Commencing Monday 8th September 2014

This Week in Brief

  • In the UK we expect Mark Carney to set out a more concrete vision of interest rate rise expectations. Should we see expectations move closer, expect some Sterling buying in the week ahead. That said, expect the Scottish Independence polls shift to Yes to create some significant volatility in Sterling markets.

  • In Europe we expect to see Germany trade data to continue to decline as Russian sanctions continue to bite and fears of further deterioration in Ukraine.

  • We expect both US Retail Sales and the UoM to come in slightly higher than previously, however risk remains firmly to the downside.

Overriding Market Themes

We start this week’s report in the US, where employers added just 142,000 jobs last month, sharply lower than the 225,000 economists were anticipating and the smallest monthly gain of the year. The unemployment rate however continued to drop from 6.2 percent to 6.1 percent. It is unlikely that one month of poor jobs growth will perturb the US Federal Reserve or cause a shift away from its first rate rise next year, however it will make it harder for the Fed to send a strong message on the health of the economy when it meets later on this month. By sector, the main sources of disappointment were a near zero net jobs growth in manufacturing, a 8,400 drop in retail and a 6,300 drop in education employment.

Over in Europe, the European Central Bank surprised markets on Thursday with fresh measures to boost a failing Eurozone economy threatened with deflation and the risks of an escalating conflict in Ukraine. ECB Policymakers cut the already low main interest rate from 0.15% to 0.05%. They also cut the deposit rate, which was already in negative territory, from -0.1% to -0.2% in the hope of persuading banks to lend more to businesses and consumers. Draghi revealed in his speech that the 24 member governing council was split over the package of new measures, but confirmed a comfortable majority was in favour of the move.

Back in the UK, Service-sector growth rose to a 10-month high in August, with the rate of expansion accelerated by market output and new orders. The Markit/CIPS purchasing managers' index (PMI) rose from 59.1 to 60.5, the biggest monthly rise since October 2013. Markit said capacity in the services sector remained under pressure even though companies continued to recruit additional staff, while ongoing competitive pressures, which placed a restriction on the pricing power of service providers, were less competitive. That said, services remain the main engine of growth for the UK economy and its continued upside momentum further enhance our growth projections for 2015.

Finally, campaigners in the battle for Scotland's future say the referendum result is too close to call with less than two weeks until the vote. Some 51 per cent of Scots back independence with ten days to go until the referendum, overturning a 22-point lead for the Better Together campaign in just a month. This continues to remain the biggest threat to Sterling in international currency markets, and as with most geo-political events, markets dislike uncertainty. The closer Scottish Independence becomes a reality, the more volatile we expect Sterling to become. With this in mind, expect GBP resistance against both the Dollar and Euro to be considerably weakened moving closer to the 18th September.

GBP This Week

We have another quiet week ahead for the UK economy with the only major release of note to come in the form of the bank of England Inflation Report on Wednesday.  The inability of Mark Carney to provide an adequate timeline for interest rate hikes along with a constantly changing sentiment means that the markets have been seeing significant volatility in recent months. With this in mind, we expect the MPC to push Carney into being somewhat more forthright with his interest rate expectations. This, coupled with continued fears that the Yes campaign have begun to usurp the No’s in the Scottish Independence Referendum, should mean we have a choppy week in sort for Sterling.

USD This Week

We have only a few economic releases from the US on our radar, with retail sales and the UoM consumer sentiment figure headlining. Starting with retail sales, with the past four releases disappointing markets, we will be hoping for a return of bullish sentiment from across the Atlantic. Markets point towards a slight uplift in the figure, however with risk firmly to the downside we could well be in store for some further bad news.

Later on Friday we expect the University of Michigan consumer sentiment figure to continue to disappoint markets, as it has done for the last four occasions. With markets pointing towards a higher figure of 83.2, however as with retail sales, risk remains firmly to the downside.

EUR This Week

In Europe we have an extremely quiet week ahead with German trade data the only release of note. Unfortunately the German economy has been somewhat of a drag on Eurozone growth of late, and this is unlikely to change in the near term. With Russian sanctions yet to fully impact the Eurozone’s largest economy and further measures likely, we are expecting to see further weakening of exports and growth throughout the remainder of 2014.


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