Sterling now undervalued?...

Week Commencing Monday 26th June 2017

 

UK: Bank of England to start raising rates - stranger things have happened!

Bank of England chief economist Andy Haldane says he may vote for a rate rise in the second half of the year.

At the last meeting, bank policymakers voted 5-3 on Thursday to keep interest rates on hold at a record low of 0.25 percent. External members Ian McCafferty and Michael Saunders joined MIT professor Kristin Forbes in voting to raise rates by 0.25 percentage points to 0.5 percent.

Supporting the move, the Monetary Policy Committee said inflation had picked up more quickly than expected in since its last economic forecast in May (currently standing at 2.9 percent).

The concerns have led to Bank of England Governor Mark Carney doused speculation that he might soon back higher interest rates, telling bankers on Tuesday that he first wanted to see how the economy coped with Brexit talks in coming months. Interesting times ahead!

UK: Business Confidence on the rise despite Brexit fears

Confidence among companies across Britain has improved significantly over the past six months, according to the latest survey from Lloyds Business Bank.

The report showed that the confidence index, a gauge of expected sales, orders and profits of some 1,500 firms over the coming six months, rose to 24 percent in May from 14 percent in January. Despite this, the British Chambers of Commerce says that economic growth will remain anaemic over the next few years.

The business group has stated that annual GDP growth will not exceed 1.5 percent by 2020 and inflation could end up being higher than expected. In May the Office for National Statistics said the economy expanded by 0.2 percent in the first three months of the year, down from its first estimate of 0.3 percent, as the key services sector lost momentum.

 

FX Forecast

Sterling (GBP) - Sterling remains range bound as markets continue to analyse Brexit positioning and negotiations. With little in the way of economic data, focus should remain on this and as always, any geopolitical or Brexit related releases will impact sentiment dramatically. We expect GBP to remain trading within the 1.13 – 1.14 bracket versus the Euro, and continue to test 1.26 versus the Greenback.

US Dollar (USD) - The Dollar remains relatively weakened despite continued focus on the Fed’s rate hike program. While we continue to see issues surrounding the Trump administration we expect to see a range bound greenback, with it continuing to struggle versus the Euro and trade the 1.26 – 1.27 range versus Sterling.

Euro (EUR) - The Euro continue to outperform most rivals as GDP and PMI numbers blow away critics. Higher inflation points towards a potentially normalising ECB, which is providing substantial buying pressures on the single currency. Brexit related news tends to have an inverse reaction, so expect Sterling to remain on the back foot and the Euro to continue to pressure the Dollar.

 

Economic Calander for the Week

UK Data:

We have a reasonably quiet week for the UK, with the final GDP numbers for the first quarter to be confirmed in on Friday. We expect no shift in the current 0.2 percent numbers, confirming the UK grew at the slowest pace versus its G7 peers.

On both Tuesday and Wednesday, Mark Carney will be speaking at the fourth annual European Central Bank "Forum on Central Banking. Market players will look for any clues on the timing of when the world's biggest central banks plan to start winding down their monetary stimulus and begin normalizing policy.

US Data:

We have a busy week for US data, with Core Durable Goods kickstarting on Monday. We expect the release to print a 0.5 percent increase for May versus -0.5 percent the previous month.

Consumer confidence is expect to edge down slightly on Tuesday, while pending home sales should pick up to 0.5 percent on Wednesday. The highlight of the week is US GDP on Thursday, which looks likely to be confirmed in at 1.2 percent.

EU Data:

We have a quiet week for the EU as Mario Draghi is set to Join Mark Carney at the ECB forum. On the data side, we expect Eurozone inflation to be revised down from 1.4 percent to 1.2 percent on Friday. Germany, France, Italy and Spain will produce their own CPI reports throughout the week.

In addition to the inflation data, the Ifo economic institute will produce monthly data on German business morale for June.

 

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