Sterling still in the doghouse?

Week Commencing Monday 12th October 2015

Overriding Market Themes

We start this week in the UK, where construction output fell by 4.3 percent in August, the sharpest fall in the index since late 2012. The UK economy has outpaced many of other advanced nations for much of the last two years but is widely expected to have slowed in recent months along with the global economy. Construction makes up about 6 percent of Britain's economy. There may well be better news ahead however for the industry, especially as recent government commitments have boosted residential construction projects that had previously been on hold. The trade figures also released on Friday showed the UK deficit in its trade in goods narrowed to GBP 11 billion in August compared with GBP 12.2 billion in July. When including the UK’s large services surplus, the overall deficit fell to GBP 3.2 billion. This release joined a number of other decent deficit figures, which showed a sharp narrowing between April and June, boosting economic growth throughout the period. So we had mixed news from the UK last week, and with inflation out this week are we in story for some Sterling upside? Let’s hope!

Moving to Germany and exports slumped by 5.2 percent in August compared to July, while imports were down 3.1 percent. This release was considerably worse than economists expected, with the market predicting a decline of only 0.9 percent. Indeed, researchers at the Ifo, which monitors German economic production, believe that German exports are taking a hit from slowing demand from emerging markets, especially in China. It also mentioned that the boost exporters got from a weaker Euro in the first half of the year is also fading. The issue with Germany, which remains Europe’s largest economy, is that any significant slowdown in its growth will hurt the whole regions recovery. The IMF now states that Germany is expected to grow by 1.5 percent this year, which is in line with the Eurozone as a whole, and by 1.6 percent in 2016.


GBP This Week

We have a relatively light week ahead for the UK, with CPI inflation and Wednesday’s labour market data likely to dominate. Inflation could be the killer however, especially given market expectations of a negative print of -0.1 percent for the month in September. In terms of unemployment, we expect the August print to remain at 5.5 percent as job creation continues to weaken, while average earnings should maintain its current pace of growth at 2.9 percent on the quarter.

We continue to remain bullish on GBP/EUR, despite Sterling’s recent poor form. This is mainly due to the significant growth differentials between the two zones. Indeed, UK economic growth remains relatively robust, however fiscal consolidations will likely weigh on UK growth, despite record low interest rates. There are also risks emerging from the upcoming EU referendum, with polls showing the in-out gap has now completely closed. Some polls are now even showing great support for the UK to exit the EU.

GBP/USD continues to point towards USD strength, especially given the divergence between expected interest rate hike pathways.

USD This Week

In the US we await September core retail sales to grow above consensus at 0.5 percent, although the headline figure should be brought down by lower gas prices to around 0.2 percent. Moving to Friday, we expect October’s UoM consumer sentiment figures to improve to 89.5 from 57.2, continuing to signal the strength of the US consumer. Finally on the production side, we expect Octobers Empire State manufacturing index on Thursday to come in at a disappointing -12 versus an expectation of -6, while September industrial production should come in at -0.1 percent versus a -0.2 percent expectation.

EUR This Week

We forecast Industrial Production on Wednesday to decline to 0.5 percent in August, while final September CPI on Friday should be confirmed at -0.1 percent (headline) and 0.9 percent (core). Given the relatively light week therefore, we expect market direction to continue to be directed by speculation that the ECB will extend their QE program. With this in mind, we have revised down our GBP forecasts with respect to the EUR to reflect recent EUR resiliency, however downside risks to EZ growth and inflation should confirm a EUR depression trend against both GBP and the USD.



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