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July 2017

Sterling slips on mixed data and Bank of England views

Published: Monday 14 August 2017

  • Sterling slips on mixed data and Bank of England views
  • GBP-USD likely to test $1.30
  • European Central Bank plans subject to speculation
By David Johnson
GBP-EUR dropped half a cent on Friday and, whilst everyone has a theory as to why that happened, no one has a definitive answer. Contributory factors include the belief that the Bank of England (BoE) will keep the UK base rate on hold during the Brexit negotiations, that wage growth data, due this week, could be poor and that Theresa May could come under pressure to make way for a ‘unifying’ leader of the Tory party. Last week offered up poorer than expected British economic data, including a widening of the trade deficit and a small drop in industrial production. That said, this week’s unemployment data is expected to remain positive and Sterling is technically oversold, so there is scope for limited recovery.
 
On the Euro side of things, rumours abound that the European Central Bank (ECB) will start unwinding some of its €2.35 Trillion in bond purchases. Reselling some of this Quantitative Easing stockpile could have profound effects on European banks and their shares, but it could also weaken the Euro; something that would benefit the Eurozone. The Euro has strengthened a little of late against the Pound and the US Dollar. That hampers exporters. But Peter Praet, the European Central Bank’s chief economist, warns that rate hikes from the ECB are a long way off. He thinks it will take a long time for Eurozone inflation to get back above the 2% target level and he feels the currency sharing bloc needs more stimulus for longer.
 
The Sterling – US Dollar rate fell half a cent on Friday as well. That is very much the UK politics story – as mentioned above – but the Pound has started to regain some of that lost ground even as I write. The fall in this pair came despite much lower than expected US job creation in June. Only 158,000 private sector jobs were created against a forecast of 180,000 plus. There is a fair amount of US data this week and the forecasts are quite mixed, but the general market tone suggests the $1.30 barrier could well be broken this week. Sterling attempted an assault on the technical resistance level of $1.3050 a fortnight ago and failed to complete the task. If that level does break, there is little to stop GBP-USD rushing up towards $1.34.
 
This week also brings the Bank of Canada interest rate decision, but no change is forecast. The report that accompanies the statement will be worth a read, though. A volatile commodity market and terse relations between the US and Canada may hinder further export growth to Canada’s major client. The US of A takes roughly three quarters of Canada’s export output.
 
In spite of all of this, Wimbledon is in full swing and Britain still has a lot of interest, The Lions tour ended in a frustrating but honourable draw. The last time that happened was in 1955 and it has led to calls for extra time to settle a drawn test series. I guess we all like a definitive outcome, but these were two very evenly matched sides and ‘honours even’ is most likely the right result.
 
Have a great week.
 

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