Currency Note

Eurozone GDP slumps to four-year low

By Paul Redmond October 31st, 2018

Eurozone GDP slumps

Happy Halloween! The eurozone got a bit of a fright yesterday, as figures released showed that the eurozone’s growth rate for the third quarter of 2018 slumped to a four-year low. In the three months to September 2018, the eurozone’s economy grew by just 0.2% when a figure of 0.4% had been expected. It is the weakest growth rate since the second quarter of 2014 and part of the reason was the fact Italy’s economy stagnated in the last quarter.

However, France’s economy grew by 0.4% which suggests Germany might well have struggled in recent times. We will know more when Germany’s GDP figures are released next month, but these are certainly worrying times for the eurozone. On an annual basis, the economy grew 1.7% which was better news, but still below the 1.8% growth the markets had expected.

Still, the euro managed to make some gains against sterling and it didn’t slide all that much against the dollar. The pound had the worst day and fell closer to the $1.27 mark. Philip Hammond’s assurances that the UK is nearing the end of austerity appear to have had little effect on the currency markets, as the pound sank to a ten-week low against the greenback. As many expected, Brexit unease continues to overshadow others events, with the Autumn Budget paling into insignificance against the uncertainty surrounding the UK’s withdrawal from the European Union.

Elsewhere, the yuan slipped to its lowest level for ten years, as the economic slowdown in China begins to take hold. It is worth noting that a cheaper yuan will make Chinese exports more competitive, which is not entirely unwelcome given the trade tariffs that America has imposed. It could well be that China is purposely devaluing its currency, although opinion is divided on whether this is actually the case. Regardless, the news is not as bad as it might be.

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GBP: sterling drops to a ten-week low against the dollar

Sterling dropped to a ten-week low against the dollar yesterday and didn’t do all that brilliantly against the euro either. As it continues to drop down towards $1.27, it has now fallen below the €1.12 mark. These are troubling times for the pound and in the last 10 days alone, GBPUSD has shed 4.5 cents. The volatility looks set to continue until we have some clarification on what sort of Brexit deal we can expect (there’s a sentence I’ve written 623,171 times).

CBI distributive trades for October was released and came in at 5 from 23 in the previous month and well below an expectation of 27. I don’t have to tell you how disappointing that release is. However, it is unlikely that this had any bearing on currency movements, which is just as well considering.

The highlight from the UK today is the Gfk consumer confidence reading for October which is expected to have dipped a little to -10 from -9 in September. Tomorrow is a busier day, with the Bank of England’s interest rate decision and Nationwide housing prices for October.

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EUR: eurozone GDP slumps to just 0.2% in the third quarter

The eurozone’s economy does not look like it is performing that well at present, if the flash reading of the GDP growth rate for the third quarter of 2018 is anything to go by. Figures released yesterday showed that the eurozone’s economy slumped to just 0.2% growth in the three months to September 2018, against market expectations of 0.4%.

Italy’s economy stagnated in the same period, so much of the blame is being laid at the eurozone’s third-largest economy’s door. However, France posted a healthy 0.4% growth, which would appear to indicate that Germany’s economy hasn’t done that well in recent time. We will know more when the figures are released next month.

Other releases included the German inflation rate for October, which showed inflation increased to 2.5% from 2.3% the previous month, and higher than the 2.4% forecast. We also saw the unemployment rate for the same month in Germany, which came in as expected at 5.1%.

Today we will see the eurozone’s inflation rate for October, which is expected to have nudged up to 2.2% from 2.1% the previous month. We will also see the unemployment rate for September and German retail sales for the same month.

USD: Trump blames midterms for market sell-off

Yet again the dollar had a fine day against the euro and sterling, though the moves were brought about from events outside of the US. Extremely disappointing economic growth data from the eurozone made the euro slip, while continuing Brexit uncertainty caused the pound to tumble.

The only release of note from America yesterday was consumer confidence in October, which came in at 137.9 from 138.4 the previous month and some way above the 136.0 the markets had been expecting. Meanwhile, in Trump-related news, the president blamed the midterms for the market sell-off. In a series of Tweets, the former reality television star dished out some investment advice. The general consensus is that some of what he said has some truth in it, but the rest is typical bluster.

The only releases of note from the US today are the employment change figures for October and mortgage applications up to 26 October 2018. Tomorrow we will see the manufacturing PMI reading for October and initial jobless claims.

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