Currency Note

UK in a Goldilocks economy?

By Smart Currency August 30th, 2016

As we return from a long weekend in the UK, we wave goodbye to the last few days, when markets processed the information from US Federal Reserve Chair Janet Yellen’s speech on Friday.

Data released last week suggests that the UK may be experiencing a ‘Goldilocks’ economy, one that is not ‘hot’ enough to cause significant inflation, or ‘cold’ enough to cause a recession. It has to be noted, however, that currency markets are extremely sensitive to unexpected economic data, events and sentiment, so we could still be in for a surprise.

Given that there is a still a lot of uncertainty surrounding the terms of the UK’s impending Brexit, it is still crucial that you hedge your international payments in order to mitigate your risk – to find out how, get in touch with is today.

Sterling weaker following Yellen’s speech

Sterling traded lower against the US dollar on Friday as US Federal Reserve Chair Janet Yellen stated that the case for raising US interest rates has ‘strengthened’.

Looking at the data releases from the UK, the second reading of Gross Domestic Product (GDP) hit the wires and did not disappoint with a revised figure. Growth in the second quarter of 2016 as expected, at 0.6% compare to 0.4% in the preceding quarter.  The figures will be a boost to the new Chancellor, Philip Hammond, who has repeatedly stated that the UK entered the post-referendum period from a position of strength.

Looking at the calendar for the week ahead, we start with some housing data that is likely to confirm the sentiment that the sector is under pressure. Meanwhile on Thursday and Friday respectively we have data on the manufacturing and construction sectors. The expectations are for these to report improvement in both sectors while still remaining in contraction territory.

Deluge of data releases for Eurozone

Friday saw the euro lose over a cent against the US dollar following Janet Yellen’s speech at the Jackson Hole Symposium where sentiment over an impending rate rise drove US dollar strength. Against sterling, the euro remained largely unaffected.

On Tuesday, the Eurozone has a number of lower impact data releases due, including the German preliminary Consumer Price Index (CPI) forecast at 0.1% and Spanish flash CPI forecast at -0.5%. Wednesday’s data releases could drive greater market volatility with German retail sales and unemployment data (both anticipated to improve on the previous months figure) and European flash and core CPI figures (forecast to be unchanged from last month). Finally, on Friday morning Spanish unemployment change will be released, which is forecast to show a 15,000 increase in the number of people unemployed.

US dollar stronger following Yellen’s speech

The US dollar strengthened on Friday as Federal Reserve Chair Janet Yellen acknowledged that the case for an interest rate hike has been increased recently, although provided no clear indication of when the next interest rate hike would come.

The US dollar strengthened following Yellen’s speech on Friday where she stated that ‘improvements in the US labour market and prospects of moderate economic growth has boosted the case for a rate rise’. However, her comments fell short of making the case for an immediate rise and the suggestion is that that any hike would be data dependent.

On Friday we had the release of US GDP data, revised down slightly 0.1% from the previous estimate of 1.2%, as the US economy expanded at an annual rate of 1.1%. Positive improvement in business investment from the preliminary estimate last month helped offset the negative effect of the lower figure. The dollar index, which measures the currency against a basket of 6 major currency pairs, was little changed at 94.75.

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