Economic Data Puts the Spotlight on the GBP. Will It Be Sink or Swim?

Looking at the day ahead, it’s a busy day for the Pound, with a heavy economic calendar to provide direction. Geopolitics will also remain in focus.
Bob Mason
Silvanute

Earlier in the Day:

It was a relatively busy Asian session on the economic calendar this morning.

Economic data through the session included 2nd quarter GDP numbers out of Japan and July inflation figures out of China.

Outside of the numbers, RBA Governor Lowe spoke before the House of Representatives’ Standing Committee on Economics ahead of the RBA’s release of its Monetary Policy Statement.

For the Japanese Yen

According to figures released by Japan’s cabinet office, the economy grew by 1.8% in the 2nd quarter, year-on-year, which was better than a forecasted 0.4% rise. The economy had grown by 2.2% in the 1st quarter. Quarter-on-quarter, the economy grew by 0.4%, slowing from 0.6% in the 1st. Economists had forecast the economy to grow by just 0.1%.

The Japanese Yen moved from ¥105.842 to ¥105.921 upon release of the figures. At the time of writing, the Japanese Yen was up by 0.06% to ¥106.01 against the U.S Dollar

Out of China

The annual rate of inflation picked up from 2.7% to 2.8% in July, coming in ahead of a forecast of 2.7%. Month-on-month, consumer prices rose by 0.4%, reversing a 0.1% decline in June. Economists had forecast consumer prices to hold steady.

Wholesale price inflation disappointed, however, with the Producer Price Index falling by 0.3% in July, partially reversing a 0.6% rise in June.

For the Aussie Dollar

RBA Governor Lowe continued to toe the line on monetary policy, stating that rates would remain low for an extended period of time.

Please find the link to the transcript from the opening statement. Salient points from the opening statement included:

  • While some slowing in employment growth is expected, the central scenario is for the unemployment rate to ease to 5% in 2021.
  • Spare capacity is anticipated to remain if employment evolves in line with the central scenario, suggesting tepid wage growth.
  • On inflation, the annual rate of inflation was at 1.6% in June, continuing to come up short of the 2-3% medium-term target range.
    • Slow wage growth, spare capacity, an adjustment in the housing sector and government initiatives to address the cost of living pressures pinned back inflation.
    • Inflation is expected to fall short of 2% in 2020 and to be a little over 2% in 2021
  • On the monetary policy front, the RBA decided to leave cash rates unchanged after 2 rate cuts in quick succession. The RBA deemed it appropriate to wait and assess developments both internationally and domestically.
  • With the outlook on inflation and spare capacity, the board is prepared to ease monetary policy further to support both.

The Aussie Dollar moved from $0.67952 to $0.68102 through the early part of the statement.

The Statement on Monetary Policy

Comparing forecasts from the statement of monetary policy released back in May:

  • The Board revised economic growth for 2019 down from 2.6% to 2.4%, while revising growth for 2020 up from 2.7% to 2.8%.
  • On household consumption, the RBA revised consumption growth down from 2% to 1.5% for 2019 and from 2.6% to 2.4% for 2020.
  • For employment, the RBA projected the unemployment rate to sit at 5.2% in Dec-19, revised upwards from 5.0% May forecasts.
  • On inflation, the annual rate of inflation was forecasted to sit at 1.7% for the year ending 2019. In May, the RBA had forecasted inflation to sit at 1.9%. For the year ending 2020, the annual rate of inflation was also revised downwards from 2.0% to 1.9%.

The Aussie Dollar moved from $0.68042 to $0.68059 upon release of the statement, which coincided with the release of China’s inflation figures. At the time of writing, the Aussie Dollar was up by 0.10% to $0.6809.

Elsewhere

At the time of writing, the Kiwi Dollar was up by 0.09% to $0.6486.

The Day Ahead:

For the EUR

It’s another relatively quiet day ahead on the economic calendar. Germany’s June trade figures and Italian inflation numbers are due out of the Eurozone.

We would expect the market focus to be on Germany’s trade figures that will likely spell more doom and gloom if stats from the week are anything to go by…

At the time of writing, the EUR was up by 0.14% to $1.1194.

For the Pound

It’s a particularly busy day ahead on the data front. Key stats include GDP, trade, industrial production and manufacturing production numbers.

We expect the GDP and manufacturing production figures to be the key drivers on the data front.

A pickup in service sector activity continued to reflect a resilient UK economy in spite of the rising prospect of a no-deal Brexit.

The GDP numbers could affirm recent chatter, however, that the UK has fallen into a recession. Any contraction would likely weigh heavily on the Pound.

Outside of the stats, the markets will need to monitor any Brexit chatter throughout the day.

At the time of writing, the Pound was up by 0.04% to $1.2138.

Across the Pond

It’s another quiet day for the Greenback, with key stats due out of the U.S limited to the wholesale inflation figures for July.

While any uptick in wholesale inflationary pressures would be positive, any upside for the Dollar will likely be limited.

Negative sentiment towards the U.S economy, fueled by the escalation in the U.S – China trade war will likely continue to overshadow the numbers.

On the day, any trade war chatter will be the key driver. U.S President Trump has had a tendency to catch the markets off guard with his tweets late in the week…

At the time of writing, the Dollar Spot Index was down by 0.07% to 97.547.

For the Loonie

It’s a busier day ahead on the economic calendar. July employment numbers will provide direction later in the day. Expect the Loonie to be particularly sensitive to any negative numbers.

Of less influence on the day will be July housing start numbers that precede the labor market numbers.

Outside of the stats, market risk sentiment will continue to play a hand on the day.

The Loonie was up by 0.08% at C$1.3216, against the U.S Dollar, at the time of writing.

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