Foreign Exchange News
10 July 2013

S&P Downgrades Italy & IMF Revise Eurozone Growth Lower

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EUR/USD 1.2815
GBP/USD 1.4905
GBP/EUR 1.1630 (0.8598)
EUR/CHF 1.2408
GBP/CHF 1.4442
GBP/AUD 1.6165

Industrial and Manufacturing production data released from the UK proved to be a disappointment yesterday, posting 0% and -.8% versus .2% and .4% expected. This bucks the trend for UK data which has been showing continued signs of improvement throughout 2013. The lack of growth in these areas highlights the unbalanced nature of the economy in the UK, with a huge bias towards the services industry leaving others struggling.

The overall impact on GBP was very much reactionary. We saw very little impact in the EUR when similar German data on Monday was weaker but the pound came under heavy selling pressure immediately following the release. Much of this sell off was Asset Purchase related, market participants believing that this would support Carney’s case for increased easing; the reality is that these declines were more than offset by stronger than expected services data last week.

There was good news for the UK as the IMF revised up their growth expectations, whilst the NIESR GDP estimate for June posted .6%. This is an independent measure of economic activity completed on a monthly basis and the three month average for the second quarter indicates the highest quarter growth since September 2010. The official GDP figure will be release later this month, and will be subject to monthly revisions over the next two.

The IMF downgraded their growth expectations for the Eurozone and despite the weekend’s political improvements, the Eurozone feels particularly fragile once again. We have seen some tentative signs of improvement in the Eurozone and it would be false to suggest we are in a similar place to July last year, but the Eurozone recovery has been built on rather fragile foundations. The IMF downgraded growth from .4% contraction to a .6% contraction for the current year, this change has come since the last release in April indicating the Eurozone continues to lag expectations.

We discussed Greece’s staggered aid repayment yesterday and also the Portuguese cabinet reshuffle highlighting our concerns, another of the vulnerable peripherals, Italy, received a downgrade from ratings agency S&P to BBB, just two steps above “junk”. This year Eurozone related headlines have a somewhat diluted impact on the markets compared to previous years, again Draghi’s comments to do whatever it takes to support the region supports the single currency but should we see rate cuts or increased easing from the ECB we’d expect the EUR to weaken further.

German inflation data released this morning was all the European calendar had to offer today and came in as expected growing .1% in June. US data had been light all week but this evening the Fed will release the minutes from the FOMC meeting in June with Bernanke speaking on Economic Policy later in the evening in Boston. The usual will apply, with markets looking for any indication of a QE taper.

EURUSD reached fresh three month lows yesterday following the IMF’s downgrade to growth expectations indicating there may be further downside ahead, we have been calling for a move back to 1.2800 since mid June, the move has occurred quicker than we expected and as such may be subject to a small bounce higher before a larger shift down occurs. With little data due out today we’d expect some consolidation into this evening FOMC.

GBPUSD also broke the fresh lows yesterday following the weaker data print in the morning but has since recovered from lows just above 1.4800 to 1.4900 right now. I’d expect the range between 1.4800-1.5000 to remain in play today with consolidation likely keeping it far tighter.

EURGBP spiked to .8668 yesterday as the pound was sold early in the day but moved lower following the IMF release, as well as the Italian downgrade and NIESR GDP estimate. We favour a tight range today between .8625 and .8575.

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