Pound strength supported by positive UK growth surprise By Jasper Lawler, Head of Research LCG - London Capital Group The UK’s Gross Domestic Product grew by 0.5% q/q in the 4th quarter according to a preliminary estimate released today. This is better than expectations of 0.4% q/q. The annualised figure was forecast to have dropped to 1.4% from 1.7% but instead came in at 1.5%, still the lowest in 5 years. That brings the 2017 economic growth rate to 1.8%, down from 1.9% in 2016; not too shabby at all, especially against such dour consensus forecasts. Sector-by-sector there has been some clear divergence within the British economy. The all-important service sector is growing at about the same pace as the headline figure while industrial production grew over 1% at the same time construction fell by a similar amount. Taking the economy as a whole, the British economy has retained a steady pace of growth, which has been slower than other G7 counties, but has far exceeded gloomy Brexit-related forecasts. Today’s data is another positive surprise for the economy that puts pressure on the Bank of England to raise interest rates for a second time sooner rather than later. The BOE is looking for 2-3 further rates hikes over a 3-year period. Solid economic growth and low level of unemployment support our call for the second BOE rate hike to come in Q2 of this year. BOE Governor Mark Carney was on the wires before the data was released at Davos. Carney sees Brexit uncertainty as the reason growth in other developed countries is outpacing the UK. We disagree; growth is just cyclical. The UK had the fastest pace of growth in the G7 and has just slipped down the pecking order as other economies catch up. If anything Brexit, via the inflationary impact of the drop in the British pound has exposed the UK economy’s over-reliance on consumer spending. Sterling shot up after the data but couldn’t sustain the strength. GBP/USD has gained over 2% so far this week, reaching a high of $1.434. President Trump’s comment that the US dollar will get “stronger and stronger” could be the beginning of a bout of profit taking into the weekend. Despite the potential for a selloff, the $1.40 level has established itself and while that remains the case, our bias remains bullish on cable
Trade war fears ease as Kudlow replaces Cohn Whilst the S&P and Nasdaq struggled overnight, the Dow Jones managed to snap its 3-day losing streak, as trade war fears eased, on the appointment of Larry Kudlow as Trump’s economic advisor. The markets are rather relieved by Trump’s choice, as reflected by industrials moving higher early on. Kudlow is known as an advocate of free trade, so given the protectionist policy concerns and trade war fears circulating, the fact that Trump is even willing to have Kudlow on his team, is an encouraging sign.
Trading has been extremely choppy over the last week as investors have focused almost single mindedly on the White House and trade war fears. Whilst these concerns are likely to hang around for a while, the FOMC next week and US earning season in two weeks, will provide distractions to traders. This is especially given the strong earnings expectations, which could serve to underpin the markets as uncertainties over the direction of Trump’s administration unnerve traders and as the Fed hikes rates.
Eurozone Inflation under the spotlight
Dovish Draghi was responsible for pulling the EUR/USD lower earlier in the week, as his concerns over a strong euro and sluggish eurozone inflation weighed on sentiment for the common currency. The dollar then cheered the appointment of Larry Kudlow a vocal supporter of a stronger dollar which boosted the greenback pulling EUR/USD even lower on Thursday.
Today attention will flip back to eurozone inflation. CPI is expected to have ticked down slightly in February to 1.2% year on year, from 1.3% in January. Month on month inflation is expected to have increased to 0.2% from a particularly disappointing January print of -0.9%. Core inflation is forecast to remain constant at 1%.
These forecasts highlight the problem of stubbornly low inflation encountered by the European Central Bank, which remains well under the ECB’s target 2%. Whilst eurozone growth was the big story for 2017, in 2018 economic data is pointing to a loss of momentum. The labour market across the bloc also has significant slack still meaning that patience is a must before inflation starts to make any meaningful move towards 2%.
EUR/USD steady at $1.30 support
EUR/USD has fallen 0.7% over the past two sessions but has once again found support at $1.23. Softer than forecast CPI data could see EUR/USD continue its declines to the next level of resistance at $1.2265, before extending to $1.22. A surprise to the upside in the CPI print could see EUR/USD push back towards support at $1.2335, opening the door to $1.2380 on the way to and beyond $1.24.
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Overnight, that unnerving trade war silence from the White House, which allowed stocks across the globe to charge higher in recent sessions, was broken. The US upped the stakes in the trade war with China, sending equity markets tumbling, as risk off prevails.
The Trump administration announced tariffs on a further $200 billion-dollar worth of Chinese imports after the US closing bell overnight. Asian markets fell heavily, with China, unsurprisingly, taking the biggest hit, down over 2% at one point; US and European futures are indicating that investors will sell out shares on the open. In the forex markets the dollar pushed higher versus most of its peers except for the safe haven yen, which experienced a surge in demand.
Pound Drops as Softer Brexit Plans Make US Trade Deal Look Unlikely
The timing of US President Trump landing on British soil couldn’t have been worse for Prime Minister Theresa May. The same day that she publishes her whitepaper outlining the post-Brexit UK-EU relationship, as a softer version of Brexit, Trump a known supporter of a hard Brexit grabs the spotlight.
Trump’s declaration that this softer version of Brexit would mean that a trade deal with the US was “probably” off the table, was a blow to both host Theresa May and the pound, sending sterling tumbling overnight. Let’s not forget that the hope of a quick trade deal with the US was a significant factor in Theresa May’s decision to invite Trump in the first place. Another embarrassment that May could have done without.
