Good morning,
GBP: Briefly lower after GDP number
UK GDP was confirmed at 0.3% for the second quarter yesterday morning, matching the previous estimate. Consumption however, the engine of UK growth for decades, looks like it is finally starting to slow in response to the economic reality that a post-EU referendum economy now faces. It fell to the lowest level since Q4 as consumers tighten their belts in the face of higher prices and lower wage settlements while businesses, unable to protect margins given higher input costs, are holding back on investment as the nature of the UK’s trading relationships with the world is left in flux.
The pressures that the UK economy is under are not dissipating anytime soon and the probability of a technical recession in 2018 has heightened in our estimation.
GBP managed to keep its head above the record low levels that it has flirted with over the past week but movements elsewhere leave the pound walking a tight rope.
Brexit negotiations are restarting soon and reports suggest that the UK’s relative silence on the level of any ‘divorce payment’ will be the next stumbling block as we come up on the October soft deadline for ‘significant progress’ so talks on trade can begin.
USD: Jackson Hole comes to life – so does the dollar
USD: Jackson Hole comes to life – so does the dollar The economic meeting in the Rocky Mountains began yesterday and while the marquee speeches from Federal Reserve Chair Yellen (15.00 BST) and European Central Bank President Draghi (20.00 BST) are yet to come, some members of the Federal Reserve are already nailing their colours to the mast. FOMC members George and Kaplan gave differing views of the US interest rate outlook with George expecting another hike in December whilst Kaplan plumped for “patience”.
We are not convinced that the inflationary pressures within the US economy are strong or reliable enough to meaningfully price in a December rate rise yet and hopes more than expectation of a hawkish Yellen speech this afternoon has given USD some legs into this morning’s open.
EUR: Markets positioning for EUR strength
We’ve spoken enough about Draghi’s speech tonight but traders are getting in position to take advantage of EUR strength after his comments hit the tape. Options markets in EURUSD, EURGBP and EURJPY have all moved in the past 24hrs to mirror increases in costs for hedging EUR upside. In other words, traders are betting that the EUR will gain against the USD, GBP and JPY over the coming sessions.
We will see at 8pm tonight.
Have a great day and a wonderful long weekend. We’re back on Tuesday.
Jeremy Cook, Chief Economist