Sterling under pressure as trade deficit weighs on UK growth
27/Nov/2015 • Currency Updates•
The Pound continues to remain under pressure today despite this morning’s robust growth data that showed the economy expanded by 0.5% in the third quarter. The figures reaffirm that the UK economy continued to grow at a respectable, albeit moderately slower clip in the three months to September.
The China-led global slowdown and strong Sterling in trade-weighted terms are no doubt hampering demand, particularly in the manufacturing sector, with the trade deficit providing the biggest drag on GDP in 18 years. Britain’s dominant service sector, however, continues to power ahead, and is more than 10% larger than during its pre-recession peak.
Despite today’s solid growth figures, and indeed a moderate pick-up in economic data this month, the Bank of England clearly remains in no rush to begin hiking rates. Zero inflation and a strong currency suggest that a rate increase in the first half of next year looks increasingly unlikely, so pressure on Sterling remains, especially against the US Dollar given the Fed looks all but certain to hike rates in December.
UK policymakers will be hoping today’s Black Friday shopping surge will give the economy the much needed impetus it needs ahead of the pre-Christmas period.
Away from the major currencies, emerging market currencies continued to sell off across the board. The South African Rand and Turkish Lira, two of the worst-performing emerging market currencies in the world this year, both lost in excess of 1% against the US Dollar as investors brace for higher rates in the US next month.
Major currencies in detail:
Sterling continued to tread its middle ground, up against the Euro and down versus the US Dollar yesterday, although much of these early losses against the Greenback were recovered as the trading session progressed. Sterling ended 0.1% higher against the Greenback and 0.1% up versus a weaker Euro.
With no economic indicator data out of the UK economy yesterday, Sterling volatility was low. Investors continued to digest comments from George Osborne’s budget on Wednesday, and the possible impact on the Bank of England’s decision-making. Little change in growth forecasts and no more than modest austerity cuts appear to have done little to change the view that interest rates will not be rising in the UK any time soon.
This expectation, due to recent dovish comments from the Bank of England, suggests we’re likely to see the Pound under pressure against the US Dollar, especially given the Fed is on course to hike US rates next month.
The Euro ended unchanged versus the US Dollar yesterday and modestly lower against the Pound.
Yesterday proved to be a similarly quiet day in the Eurozone economy, with no major releases meaning that the Euro traded within a narrow band of its major peers. Growth in Spain ticked upwards to a very impressive 3.4% in Q3, while private loans expanded by 1.3% in October, according to the ECB.
Focus was instead exclusively on the ECB, which in our view is now all but certain to expand its monetary stimulus next week.
Today should be a much busier day in the Eurozone economy. Germany import prices this morning will be followed by Euro-area wide business and consumer confidence.
The US Dollar was little changed against its major counterparts yesterday, ending the day where it began.
With markets closed for Thanksgiving yesterday there were no announcements at all out of the US economy. Trading today will be equally quiet with limited liquidity and a lack of economic data due to the Thanksgiving holiday.
Normal service will resume in the US next week, with the potentially crucial November labour report the highlight. Investors will be looking to see if the US labour market lost steam this month following the stellar non-farm payrolls report for October.
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