Foreign Exchange News
24 October 2014

UK Economy Starting to Feel the Chill

EUR/USD 1.2648
GBP/USD 1.6031
GBP/EUR 1.2674 (0.7889)
EUR/CHF 1.2061
GBP/CHF 1.5285
GBP/AUD 1.8255

Only this time last week equity markets were recovering from a mass sell off due to a number of factors such as slowing global growth, numerous geopolitical tensions and the Ebola crisis. However, at the close of trading yesterday equities had regained all of these losses with the DJIA in the US for example closing up 1.32%. However, news last night that a returning doctor in New York had been diagnosed with Ebola has caused these fears to return with European equities opening on the back foot with the FTSE100 down over 0.5% and DAX 0.55% at time of writing. Early US futures also indicate similar trends when the US bourses open later today. From a currency perspective heightened risk has seen safe haven flows with the usual trio of the Japanese Yen, Swiss Franc and US Dollar all benefiting.

In the last couple of weeks we have certainly seen a slowdown in the UK economy, which has seen news flow aggressively deteriorate. Market analysts have been overestimating releases of late and this has opened the door for downside surprises. This trend continued yesterday in the form of UK retail sales, which fell to -0.3% on the month vs 0.0% expected, the weakest figure since January of this year. The retail sector accounts for nearly 6% of the UK economy and the humble retail sales figure yesterday confirmed that Britain’s economic recovery is starting to cool.

Over the last several weeks we have seen concerns around slow wage growth, falling house prices and global economic worries, particularly around the Eurozone. This lackluster recovery in the UK has begun to drag on interest rate expectations. This has also seen the BOE’s ‘unreliable boyfriend’ Mark Carney, living up to his nick name by again back tracking and stating that there is no rush to normalise policy.

However all may be forgotten today, if we were to see better than expected third-quarter UK GDP figures which headline the economic calendar today, we could see a change in momentum. While analysts are expecting a slowdown, with output rising 0.7 percent in the three months through September compared with 0.9 percent in the prior period, an upside surprise figure here, in turn, stands to produce the opposite result and revive hope of a 1Q 2015 hike.

It has been a relatively quiet week for the euro, with many analysts waiting for Sunday’s big event regarding European bank stress test results. These results will see regulators in Europe reveal whether 150 of the biggest European Union banks are strong enough to weather another financial crisis. The ECB have utilised much of their available tools and have really thrown the kitchen sink to try and improve Europe’s struggling inflation figure. Many economists believe that the falling inflationary figure is partly due to banks reluctancy to lend to households, companies and each other, holding back much-needed investment. The hope here is that these results will weed out weak banks and help demonstrate to investors that the blocs financial system is safe.

The Eurozone did get a little boost ahead of these results as the flash composite purchasing managers index (PMI) for the eurozone edged higher to 52.2 in October from 52.0 in September. Germany’s manufacturing PMI also came in better than expected at 51.8 for October from 49.9 in September, where analysts had been expecting a drop to 49.5. Given Germany’s importance to the eurozone economy, this is encouraging especially as we are back above the key 50 level, which indicates industry expansion.

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