Sterling hanging in there...

Week Commencing Monday 15th August 2016

 

Sterling: Not dead just yet!

Inflation rose to the highest level in 20 months in July, with the consumer prices index ticking up to 0.6% last month from 0.5 percent in June, according to the latest figures from the Office for National Statistics.

Input prices rose 4.3 percent in the year to July, compared with a drop of 0.5 percent in the year to June, as it was partly impacted by the fall in the value of the pound, which drove up the cost of imported metals and chemicals.

Transport costs were the main boost to the inflation rate in July, with gasoline and second-hand cars having the largest impact, according to the ONS. But the most noticeable early impact of sterling’s weakness was seen at the producer level. The cost of imported materials rose an annual 6.5 percent in July, while imported food materials jumped 10.2 percent.

Sterling has dropped about 13 percent against the dollar since the referendum. As a result, the Bank of England expects inflation to reach its 2 percent target faster than previously anticipated, though that didn’t stop it responding to Brexit threats with new stimulus this earlier month, including the first interest-rate cut since 2009.

US: Philly Fed points to continued health of US economy

The Philadelphia Fed’s barometer of regional manufacturing activity rebounded slightly into positive territory in August, only the third positive reading of the year.

The Philadelphia Federal Reserve manufacturing index was 2.0 versus last month's print of -2.9. The survey's six-month outlook measure rose for a second month to 45.8 from July's 33.7. August's reading was the highest since January 2015.

While the current activity measure rose, two components tumbled, which underscored the lingering weakness in U.S. mid-Atlantic business activity. The employment index dropped to its weakest since July 2009 to -20.0 from -1.6, while the new orders index fell to -7.2, the lowest since December, from 11.8 the prior month.

The Philadelphia Fed regional business index is seen as one of the first monthly indicators of the health of U.S. manufacturing, leading up to the national report by the Institute for Supply Management.

 

FX Forecast

Outlook in EUR/USD is unchanged. While further rise could be seen, we still expect strong resistance from 1.1426 to limit any potential upside. Below 1.1233 should turn bias back to the downside for 1.0911/0951 support.

GBP/USD formed a temporary low at 1.2865 last week, ahead of 1.2794 support, and recovered. Sentiment post retail sales should keep Sterling trading above 1.30 for the time being, atleast until PMI's are released next week.

GBP/EUR’scontinues to hover around the 1.16 pivot level, with little in the way of direction to be found. Long term bias continues to point to the downside, however with UK Q2 GDP out this week there is certainly scope for further rises against the single currency.

 

Economic Calander for the Week

UK Data:

All eyes rest on UK GDP this week, with a 0.6 percent print widely expected. Given the GDP result includes only a few weeks post-Brexit, there is little risk of a hugely disappointing release, so expect Sterling to be supported as we draw towards next weeks PMI run.

US Data:

We have a relatively busy week for the Dollar, which kick's off with New Home Sales on Tuesday. We expect to see a 580k print in the number, roughly in line with last month's 592k release. Oil inventories should also be a interesting release, however we expect no real declines in the amount after last months 2.5 million barrel drop. Durable Goods has the potential to move Dollar markets with a solid 0.4 percent print expected, while US GDP on Friday should point to a 1.1% annualised growth rate.

EU Data:

We have little in terms of European releases this week, with Manufacturing and Services PMI the only releases of note. We expect Tuesday's Manufacturing PMI figure to come in slightly lower than the 52.0 print the market expects, especially on the basis that Italy and some other southern European countries effectively shut down over August. Services could be more buoyant, with Gerrman and French banks leading the charge.

 

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