Sterling on the slide as the doves swoop in!

Week Commencing Monday 24th August 2015

Overriding Market Themes

We start this week in the UK, where Britain’s public finances recorded their first July surplus in three years after the country's economic upturn spurred the strongest income tax receipts for the month. State coffers were boosted by 18.5 billion Sterling of tax receipts, accounting for the biggest tax take for July on record. Indeed, Public finances have traditionally been in surplus in July, but half-hearted wage growth in the previous two years depressed the usual surge in payments from individuals filing self assessment income tax returns. Although obviously a positive piece of news, it is not all roses for the Chancellor this summer, especially given that wages continue to grow at a considerably slower rate than before the financial crisis. A study on Friday showed annual pay rises in Britain remained stuck at 2 percent in the three months to July, with little sign they will pick up soon. All this means that Osbourne’s deficit reduction plan continue to present real problems for the government. In the 2014/15 financial year, the deficit stood at 4.9 percent of gross domestic product, half its level in 2010 when Osborne's Conservative Party first took power, but still larger than the deficit in the finances of most other advanced economies.

Over in Greece, some rebels from Alex Tsipras government opposed to the bailout deal the party signed have formed a new ultra left-wing party. Greek media reports say 25 rebel Syriza MPs will join the new party, called Laiki Enotita, which is roughly translated to Popular Unity. Its leader, the former energy minister Panagiotis Lafazanis, argues that Greece would be better off leaving the euro and going back to the drachma. Tsipras reigned as prime minister last week and is standing for re-election with the date for the election set on the 20th September. Syriza won 149 seats in Greece's 300-seat parliament in the last election in January. The conservative pro-bailout New Democracy party came second, with 76 seats. The new Popular Unity party becomes the third largest in parliament. Will they shift the balance of power away from Tsipras and bring the bailout under renewed scrutiny? Unlikely! Despite his dramatic policy reversal over austerity, a recent opinion poll last month gave him a 61 percent approval rating. One thing is sure, expect Greece to become the number one European story once again in a few weeks!

 

GBP This Week

The only release of note from the UK this week is GDP, which we expect to be confirmed in at 0.7 percent on the quarter. This is still a very strong growth print, especially when judged against the UK’s peers in Europe, however given it is reasonably expected by markets, we doubt it will have a vast impact on Sterling asset prices moving forward this week.

Also, as the overall policy picture in the UK remains tight and Sterling’s continued strength versus other G10 currencies, we do believe that further losses could be found. We continue to think that the MPC is uncomfortable with recent strength in the currency and as such, a considerably weakened Sterling may be needed to get inflation on track.

USD This Week

The most important event for the US dollar will be VC Stanley Fischer’s remarks on US Inflation at the annual Jackson Hole Economic Symposium on Saturday. This will be even more relevant given the upcoming FOMC meeting on 17th September and the ongoing discussions surrounding the expected Fed rate rise. We continue to believe that September will be the month that they start normalising rates, however risks remain to the downside especially given the tepid global growth rates we have been seeing.

The only economic focused release of note is US GDP on Thursday, where we expect a reasonably positive print of 3.2 percent annualised. The US economy continues to lead the western world in terms of GDP growth this year, and this print indicates a further 0.9 percent growth when compared to last quarters figures.

EUR This Week

German final Q2 GDP and August IFO’s will be the main focus this week, with further geo-political events in Greece potentially weighing down on the single currency. On the data, final GDP expected to be confirmed in at 0.4 percent for the quarter while IFO business climate index should move moderately lower to 107.6 from 108.0. Additionally, a number of ECB members are expected speak followed closely by next week’s ECB meeting.

Given the recent appreciation in the Euro relative to other currencies, we do expect to see some sell offs as we draw closer towards the month end. That said, we are adjusting our EUR forecasts on EUR/USD to 0.98 at year end, considerably higher than the 0.92 we were initially projecting last month. GBP/EUR should be more interesting, however while we continue to see dovish Bank of England sentiment we expect to find a depressed Sterling relative to its European counterpart.

 

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