UK GDP continues to shine depsite BREXIT...

Week Commencing Monday 30th January 2017

 

UK: GDP smashes forecasts! What Brexit concerns?

Buoyant consumer spending numbers kept the UK economy growing in the fourth quarter, despite Brexit woes.

Gross domestic product grew by 0.6 percent in the three months to December, the same rate as the previous two quarters, said the Office for National Statistics. The growth was higher than expected and countered predictions before and after the June 23 referendum that Britain would be plunged into “inevitable” recession if it voted to quit the EU.

Within the ONS report, it put GDP growth down to the dominant services sector, with a strong contribution from retail sales and travel agency services as consumers continued to spend in shops and online. Business services and finance industries were also strong at the end of last year.

The government was quick to seize on the GDP figures as evidence that the UK will continue to perform well outside the EU. This remains to be seen, with many economic pundits pushing back their gloomy expectations, but not backing away from them. One thing is for sure, the UK economy has handled Brexit extremely well. Long may it continue!

US: GDP goes south at the Donald takes the helm.

Stateside, American gross domestic GDP growth slowed to an annualised rate of 1.9 per cent in the final quarter of 2016.

The annualised estimate was considerably lower than the 2.2 percent that market analysts had been expecting and down from the huge 3.5 percent rate posted in the third quarter. Full year growth for 2016 for the world’s largest economy is now estimated to be 1.6 per cent, down from 2.6 percent in 2015.

This compares with the UK’s Office for National Statistics, which earlier this week estimated that the UK economy grew by 2 percent last year. The slowdown, even if it proves temporary, may well deter the Federal Reserve from raising interest rates again until the economics post-Brexit and Trump become clearer.

Trump’s policies suggest that a GDP growth rate of 4 percent is achievable, however this remains to be seen. With a labour market that some economists say is close to full employment, Trump has inherited a strong foundation. With rising wages, robust housing and strong banks, the promise of infrastructure spending and repatriation of factories will give the US economy a big boost.

 

FX Forecast

The EUR rebounded versus the Greenback last week as Trump fears saw a slight decline in the Dollar. Bias this week remains neutral, however with a heavy week of US data and a potentially hawkish FOMC, the EUR should be on risk. Should we see solid numbers stateside, expect the pair to track south moderately, potentially testing the 1.05 psychological levels.

Sterling remains robust versus the Dollar after a solid performance from Theresa May over the weekend in Washington and Ankara. Bias remains neutral however, verging on negative as we build closer to the Article 50 trigger. This weeks PMI’s could surprise to the upside, and if so expect a mixed bag for Sterling this week, with potential upside remaining at the 1.27 mark while resistance should prevent 1.2250.

Sterling versus the Euro remains a highly volatile pair, with little in the way of side direction. With both Mario Draghi and Mark Carney speaking this week, anything could happen to these rates. Technically, we expect Sterling to struggle to push above 1.18 again, while 1.14 should be hard to break. Expect the pair to trade the range.

 

Economic Calander for the Week

UK Data:

We have a busy week for the UK with both the Bank of England and the PMI’s all expected to be released. We do not expect any shifts in monetary policy of sentiment from the Bank of England’s MPC, however any comments in the press conference surrounding Brexit’s impact on the UK economy, inflation or interest rate paths could have a serious effect on Sterling.

The PMI’s are widely expect to post slightly lower, with the critical Services PMI expected in at 55.8 versus last months 56.2. Manufacturing should fair slightly better, with only a 0.2 drop from last months 56.1, while Construction should drop from 54.2 to 53.8.

US Data:

We have a busy week for the US with the FOMC headlining. Any comments surrounding their interest rate hiking path will impact Dollar markets, with any sign of cooling likely to weaken the Greenback further. Nonfarms and Unemployment are both important on Friday, however we do not forecast any change in the unemployment rate and only a marginal increase in payrolls from 156K to 171K.

EU Data:

We have a quiet week for Europe, with Mario Draghi’s speech the highlight. As with Mark Carney, any talk of either Brexit or European integration issues are likely to impact markets more than his economic assessments of the Eurozone. We also look forward to Eurozone inflation, which looks set to make a large jump from 1.1 percent to 1.5 percent.

 

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