Sterling struggles amid signs of UK slowdown

Claire Hogarth04/Aug/2014Currency Updates

Economic data last week firmly established that the gap in economic performance across the Atlantic remains as wide as ever. Even the resilient UK economy is starting to show some signs of a slowdown. From the US, we saw very strong 2Q GDP numbers and yet another solid payroll report in July. By contrast, UK sentiment numbers and Eurozone inflation delivered respective downward surprises. Although the euro managed to hold its own better than sterling, unless there is some significant pick up in the tone of macroeconomic data, all European currencies are likely to struggle.

GBP

Last week’s data sent the clearest message yet that above-trend growth in the UK is slowing into the second half of the year. The manufacturing PMI sentiment showed a significant decline, in a sign that recent sterling strength is starting to bite into the UK factory sector. Consumer confidence also pulled back. Perhaps more critically, from the point of view of monetary policy, house prices are starting to level off, with just a 0.1% MoM increase in July. It must be noted that 3Q information is still tentative and subject to revision, but data so far would be consistent with growth around 2% rather than the 3+% gains we have been seeing in the last quarters. Unsurprisingly, sterling reacted badly to these indicators and pulled back yet again against both the dollar and the euro.

EUR

Eurozone inflation continues to tick down ever closer to the 0%v mark. In July, YoY inflation ticked down from 0.5%to 0.4%. This downtick was mostly caused by energy prices, which gave commentators some comfort. We would note that whether driven by energy, food or core prices, the downward trend in inflation appears relentless. This numbers support our expectations of further rhetoric and action from the ECB as soon as the September meeting – we expect little news out of the traditionally sleepy August meeting, when a large chunk of the ECB’s staff and council members are in vacation mode. Unemployment did tick down to 11.5%, and it appears that we have seen the highs for this cycle there. However, the still enormous slack in the labour market will provide scant comfort to the ECB authorities.

USD

Major economic releases last week painted an undeniably strong picture of the state of the US economy. GDP wroth in the second quarter came in at 4%, of which 1.7% was payback for the draw down in inventories experienced in the dismal first quarter, which was revised up a significant 0.8% to -2.1%. The labour market produced yet another solid report, with job growth of 209,000 in July, essentially stable unemployment, and a welcome uptick in labour force participation, as well as very moderate real wage gains. There is little in the horizon to deflect the Federal Reserve from the path we expect it to follow. An end to bond purchases in October, and a hike in rates sometime in the first quarter of 2015.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.