UK GDP the highlight for Sterling pairs this week...

Week Commencing Monday 17th October 2016

 

CHINA: GDP remains robust despite debt bubble

The Chinese economy expanded at an annual rate of 6.7 percent in the third quarter, in line with the government’s full-year target.

This, coupled with GDP growth of 6.7 percent in the first and second quarters of 2016, seems to be allaying fears of a sharper slowdown in the country on the back of continuing turmoil on currency and stock markets.

Two critical sectors, both retail sales and investment, have powered the Chinese economy this year, rising 10.7 and 8.2 per cent respectively in September. Industrial production growth however slowed to 6.1 percent in September, an indicator which easily remains the largest contributor to Chinese GDP.

Many analysts believe this year’s stronger than expected growth has been down to a dangerous expansion in credit, especially for real estate developments. Debt, obviously, has to be paid back and with debt now running at 170 percent of GDP, many are question how much further the economy can grow.

UK: British banks get ready to jump ship

A report from the British Bankers Association has suggested that Britain’s biggest banks are preparing to relocate out of the UK in the first few months of 2017 amid growing fears over Brexit.

It seems the City believes that the government’s stated intention to take control of the freedom of movement into the UK is a deal breaker to any chance of retaining the present terms of trade for banks.

A hard Brexit would involve the UK leaving both the single market, a central pillar of which is freedom of movement, and the customs union, which could potentially reintroduce tariff and non-tariff restrictions on British imports and exports.

Within the report it is claimed that US banking giant Goldman Sachs is among those drawing up plans to transfer around 2,000 of its employees to a rival European city, should the UK lose its passporting rights.

EU: CETA on the brink as small Belgium region looks to block

The possible collapse of a free-trade agreement between the European Union and Canada is the latest sign of how complicated things could get between the UK and EU over Brexit negotiations.

Currently a small region of Belgium, known as Wallonia, is holding back the deal stating it is a bad deal for Europe’s farmers and gives too much power to global corporate interests.

Wallonia is one of five regions in Federal Belgium, which requires a unanimous agreement within its government to give the deal its blessing. The political impasse led to extraordinary scenes on Friday of Paul Magnette, Wallonia’s minister president, negotiating directly with Canada’s trade minister Chrystia Freeland, while EU leaders waited to learn the outcome.

This deal has been long in the making, and to hit a hurdle this big just before it is signed is a big disappointment. Outlook for Brexit negotiations just got a little dimmer!

 

FX Forecast

EUR/USD pushed to the downside last week as traders reassess USD shorts on the back of renewed hawkishness from the Fed. 1.08 now appears to be in reach and should we see a decent US GDP print, we could see the rate drop as low as 1.0715. With little in the way of European data this week, we expect upside momentum to be muted at best.

GBP/USD continues grinding lower on the release of strong data which has increased the chances of the Federal Reserve increasing interest rates. UK GDP will be the main mover of Sterling markets, with a decent print likely to reinforce the 1.21 – 1.23 range we are in. With a decent GDP print and perhaps a resolution on CETA, expect Sterling to perform well.

GBP/EUR remains range bound last week as markets continue to wait for further Brexit news. This weeks GDP s will likely cause movement, as would any resolution in the CETA discussions. With 1.10 gathering support, we expect markets to remain range bound with Sterling pushing to the upside. As always, headlines concerning Brexit and which way the government is swinging on the bard-versus-soft Brexit scale are the main focus.

 

Economic Calander for the Week

UK Data:

We have an important week for the UK as continued Brexit speculations continues to dominate the news wires. Mark Carney is set to speak on Tuesday before the House of Lords Economic Affairs Select Committee, which will certainly contain some Brexit material. Thursday sees the release of the all-important GDP figures for the UK, with a 0.3 percent third quarter expected, quashing fears of a Brexit fuelled technical recession.

US Data:

We have a busy week for the US we Consumer Confidence kick starting the week, followed by Wednesday’s New Home Sales and Crude Oil Inventories. Core Durable Goods and Pending Home Sales on Thursday will also be a decent watch however all eyes remain on US GDP, which is widely expect to come in at 2.5 percent annualised.

EU Data:

We have a quiet week for the Eurozone with Mario Draghi’s speech about stability, equity and monetary policy at the DIW Economic Institute in Berlin on Tuesday the highlight. CETA trade negotiations will therefore likely dominate, especially as it is being viewed as a barometer on future UK/EU trade negotiations.

 

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