Currency Note

IMF cuts UK and US forecasts, Eurozone recovery continues

By Christopher Nye July 25th, 2017

currency fluctuations

Yesterday the International Monetary Fund cut its forecasts for UK growth this year, saying that recent evidence showed that the economy is weakening. The IMF now expects Britain’s GDP to expand by only 1.7% this year, down from the 2% forecast in April. If this proves correct it suggests that the uncertainty surrounding by Brexit might be hurting the UK.

Having said this, it is worth remembering that the IMF predicted Britain would go into recession if it voted to leave the EU. That obviously didn’t happen, though there’s no telling whether it will eventually prove to be the case. As we have said time and again, nobody is exactly sure what is going to happen in the future.

The IMF also cut its growth forecast for the US, having cast doubt that Donald Trump will deliver on his infrastructure plans. As has been the case in recent times, the eurozone recovery continues and, while the growth slipped a little to a six-month low, companies across Europe continue to expand. Following this, the euro strengthened against the US dollar to 1.1670 – the highest level since January 2015.

It’s now only a day until our latest webinar in the series. Two of our currency risk management experts will be talking to you about the uncertainty surround political events, possibilities surrounding future economic data, and what you can do to mitigate risk.

GBP: will the Bank of England’s Chief Economist change his stance on interest rates?

Sterling traded within a limited range yesterday, although it did regain some of the losses of last week against the US dollar following the lower-than-expected inflation number. Over the weekend the dollar was on the back foot as the possible Trump and Russian collusion story continues to drag on.

Looking to the day ahead, we have the CBI industrial orders which is an index based on a survey of about 550 manufacturers. Ultimately, it is an assessment of their order books for the coming three months and is thus a reliable representation of the health of the sector. The figure is expected to drop from 16 to 12 showing that the volume of orders has dropped.

After the European markets have closed we have the BoE’s Chief Economist Andy Haldane speaking about the international monetary and financial system. Last time Haldane spoke he appeared to be leaning towards a rate hike. With inflation sliding last week, the market will be keen to decipher his rhetoric to see if he offers any follow up comments on UK interest rates.

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EUR: euro remains strong despite softer data

The eurozone started the week with slightly softer data than was forecasted but it still posted an elevated level. For example, if it were not for the last two months, the German manufacturing PMI would be reporting the highest level since 2011. The eurozone manufacturing PMI echoed the same sentiment. As a result, the effects on the single currency were more limited than they might ordinarily be.

Looking to the day ahead the German IFO data will be under the spotlight. This is a highly respected index due to its large sample size and historic correlation with the German economy and takes a view on the six-month outlook.

USD: after a quiet day, today is an important one for the dollar

It was another quiet start to the week for the dollar, with general market sentiment leaning towards the downside following last week’s continued political uncertainty surrounding the Donald Trump administration.

Although there was little in terms of economic data yesterday, we have plenty of dollar-centric data this week that could dictate the flow of the market. Today we have consumer confidence, although the main focus will be towards the FOMC’s rate decision. While we don’t expect an interest rate hike, we will be looking for clarity on when balance sheet reduction will begin and the timing of the final forecast interest rate hike this year.

Any positive statements towards either of these could help support and strengthen the currency’s position, a much-needed outcome given the recent concern.

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