- Update: Latest IMF forecasts slash UK growth – Brexit has lowered outlook
- Pound falls on profit taking – UK unit had soared after BoE rate freeze
- Euro hit by further tragedy – Another terrorist attack takes place in France
- US Dollar positive after Chinese data – GDP figures allay slowdown fears
- GBP EUR, GBP USD forecast – BoE speech on Brexit and monetary policy in focus
Thursday’s surprise rate freeze from the Bank of England (BoE) boosted GBP EUR and GBP USD, with Friday’s exchange rates weakening on subsequent profit taking.
Pound Slumps on IMF Growth Forecasts
The International Monetary Fund (IMF) has released its updated global growth forecasts. Blaming Brexit for throwing ‘a spanner in the works’, the Fund has downwardly revised UK growth expectations by nearly a percentage point for 2017. After having predicted growth of 2.2% in its World Economic Outlook, released in April, the Fund now expects the UK economy to expand by 1.3% during 2017.
(Last updated 20th July, 08.41)
Bank of England Rate Freeze Triggers Pound Sell-Off
The recent decision by the Bank of England (BoE) to freeze interest rates, against market expectations of a rate cut, saw the Pound registering a strong performance on Thursday. Despite market conviction of a cut, only one policymaker voted in favour of changing interest rates. However, the accompanying statement strongly indicated that there would be further policy easing in August. Traders took the opportunity to realise their gains on Friday, weakening Sterling again. However, GBP EUR and GBP USD exchange rates still remained around or at their highest levels this month, respectively.
Domestic data weighed on the Pound, with the latest construction output figures for May reminding investors of the poor construction PMI released recently. Construction weakened on the month by much more than was forecast, with April’s 2.8% growth giving way to a decline of -2.1%. A drop of 1.3% had been forecast. On the year, output didn’t decline as much as forecast, although the decline of -1.9% was still sizeable.
Euro Weakens as Markets React to Further Vicious Terror Attack in France
Investor relief over the latest Chinese data faced headwinds from ecostats closer to home and the tragic events unfolding once again in France on Friday.
Expected to weaken, Chinese GDP for the second quarter instead remained steady, lessening fears that the country was heading for a ‘hard landing’ as a result of its bumpy transition away from manufacturing.
The European Central Bank’s (ECB) Survey of Professional Forecasters showed that analysts had cut back their growth and inflation expectations for the rest of 2016 and throughout 2017. The official press release that accompanied the release of the survey stated that;
‘Respondents to the ECB’s Survey of Professional Forecasters (SPF) for the second quarter of 2016 have revised down their inflation expectations for this year by 0.4 percentage point compared with the previous survey round to 0.3%. They reported that the downward revisions mainly reflected oil price developments since the previous quarterly survey, conducted in January.’
Markets were shocked by Thursday night’s developments in Nice, where a terrorist attack killed over 80 people and injuring around 200, including children, as they returned from a Bastille Day celebration.
US Dollar Strengthens; Advance Retail Sales Growth has ING Rethinking Fed Hike Bets
The US Dollar was mostly strong on Friday thanks to market relief that the latest Chinese growth data had printed strongly.
US data was fairly mixed, but not poor enough to generate significant headwinds for the US Dollar. Advance retail sales surprisingly increased in June, although the previous month’s growth was slashed down to 0.2%. Non-core consumer prices failed to grow, but core inflation unexpectedly accelerated.
Some still interpreted the latest figures hawkishly, however. Speaking of the advance retail sales figure, ING Chief International Economist Rob Carnell commented;
‘Markets have virtually no tightening by the Fed priced in until late 2017, but following on from the strong recent labour market report, the latest US data indicate that there is nothing much wrong with either US growth, and few reasons for concern about inflation either.
Markets seem in a wait-and-see mode following the UK Brexit vote, and the Fed seems in no hurry to disappoint them by doing anything radical … But the evidence is mounting that the pessimism on the US economy and the Fed in particular is overdone, and a market rethink cannot be too far away.’
GBP EUR, GBP USD Exchange Rate Forecast; BoE Weale to Speak on Brexit and Monetary Policy
What little UK data remains for release today, with the Rightmove House Prices index having already been released, will be highly scrutinised. Bank of England policymaker Martin Weale is due to give a speech on the impact of Brexit on monetary policy. Considering the Bank of England has been at the centre of market focus since the referendum, his words are likely to cause significant volatility.
There is no Eurozone data due today. US data is sparse, with the most high-impact release being July’s NAHB Housing Market Index, forecast to remain level at 60.