Pound (GBP) Sinks as CBI Revise 2016/17 Growth Forecast
Pound Sterling (GBP) is deep in negative territory today following the news that the Confederation of British Industry (CBI) has cut its growth forecast for the next two years by -0.3%. According to the Confederation, UK GDP will be 2.3% in 2016 and 2.1% in 2017. The CBI also believe that the Bank of England (BoE) will keep interest rates on hold for the rest of 2016. It is likely that the Office for Budget Responsibility (OBR) will revise its forecasts for growth down from 2.4% in 2016 and 2.5% in 2017 in time for the next budget.
Poor UK Production Figures Haven’t Slowed Pound (GBP) Advance
UK industrial production and manufacturing production figures have printed worse-than-expected, all showing a contraction in sector activity during December. The only glimmer of positive news was that the month-on-month (MoM) Manufacturing Production decline slowed, although the rise from -0.3% to -0.2% is worse than the 0.1% anticipated. The UK manufacturing industry is now -6.5% below the level it was before the financial crash, while the industrial sector as a whole is almost -10% weaker.
The Euro (EUR) is weak today against both Pound Sterling (EUR/GBP) and the US Dollar (EUR/USD) thanks to the recent stock market routs. Meanwhile, Pound Sterling is recovering after widespread losses followed the announcement yesterday of a record high trade deficit in 2015 and the US Dollar remains weak as investors eagerly await a public appearance by Fed Chair Janet Yellen later during the European session.
Euro to Pound Sterling (EUR/GBP) Exchange Rate Weak: Markets Question Stimulus Viability
News that China had been forced to expend $99.5 billion of its foreign reserves in January in a bid to keep the Yuan Renminbi (CNY) stable caused another investor panic, dragging stocks down yesterday. The fresh market rout, which has abated for the time being, has hit the banking sector particularly hard. Institutions such as Deutsche Bank, Santander and UniCredit saw the value of their riskiest securities, CoCo bonds, slide to new lows as investors turned to safer assets.
The Euro received a boost from the mass stock desertion, with analysts speculating that Eurozone banks were selling overseas assets and converting them into Euros, increasing demand for the common currency. The development saw the EUR/GBP exchange rate hit its best level since January 2015.
The appreciation causes a headache for the European Central Bank (ECB), as a stronger Euro stifles inflation by increasing purchasing power. Economists also question whether further cuts to the negative deposit rate, a measure many are expecting from the ECB’s March meeting, would put excessive pressure on bank profits.
UK trade data also helped the Euro charge. While the figures for December printed positively, the overall picture for trade in 2015 showed a record high trade deficit and a widening trade gap in the final quarter of the year.
There is little Eurozone data due out today, while the UK has important industrial and manufacturing production figures, as well as the NIESR Gross Domestic Product Estimate.
Euro to US Dollar (EUR/USD) Exchange Rate Forecast: Investors Turn to Yellen for Direction
Friday’s mixed US Non-Farm Payrolls report confused expectations regarding the future of US interest rates. The overall jobs figure was significantly lower than expected, yet unemployment fell and wages showed strong growth. Before the result, markets were almost in agreement that there would be action from the Federal Reserve in March, but developments since have caused rife speculation. The Fed had already sparked concern at the end of January by asking US banks to evaluate the stress effects of the US having negative interest rates.
Consequently, all eyes will be on Janet Yellen today as she appears before the House Financial Services Committee. Investors will be hoping that she provides some hints on the direction the Federal Open Market Committee (FOMC) will take in the March meeting.
Current EUR, GBP, USD Conversion Rates
The Euro to Pound Sterling (EUR/GBP) exchange rate is currently trending around 0.7778, while the Pound Sterling to Euro (GBP/EUR) exchange rate is trading in the region of 1.2855.
The Euro to US Dollar (EUR/USD) exchange rate is trending around 1.1258, with the US Dollar to Euro (USD/EUR) exchange rate currently trading in the region of 0.8880.