This week saw an abundance of economic data to guide sterling trade. The final release of Q1 GDP came out at 0.3% versus the previous estimate of 0.2% but despite the increase in growth reaction was slow. The Office of National Statistics, after the release, refused to give any reason for why it had delayed the GDP data for a month but traders were reminded of the comments made by the ONS in June stating they had found “potential errors” in the national accounts and scaled back sterling gains. Economists questioned the validity of the figures and kept markets cautious for some time despite assurances from the ONS that they were “comfortable” with the data.

Interest rate expectations took over from the focus on growth after the release of CPI data, inflation remained well above the Bank of England’s 2% target at 3.2% y/y for June. The high inflation number raised speculation that the BoE would be forced to adopt a more hawkish stance on interest rates and set the pound back on an upward trend. Employment data in the U.K. added further support for that pound but again these were tentative as concerns over future unemployment levels encouraged caution. The number of jobless claims dropped to -20.8K form -30.9K in May while the ILO unemployment rate fell to 7.8% from a previous and expected 7.9% level. The caution came from the fact that markets are anticipating the announced public sector job losses expected in a few months time.

The later part of the week had the pound trading at the mercy of market sentiment and EUR/USD movements due to a lack of further economic data or events. The euro’s continued advances versus the dollar pushed the pound to the lows of the week against the single currency, but allowed it to make consistent gains against the retreating U.S. dollar to close near a 2 month high on the greenback.

The euro began the week on the back foot as some profit-taking on last week’s gains and speculation over the announced bank stress tests impacted the single currency. Rating agencies once again affected sentiment and weighed on the euro, Moody’s rating agency downgraded Portugal to A1 from AA citing concerns over government finances weakening in the medium terms as the reason behind their decision. German economic sentiment data added further pressure to the euro coming out quite a bit lower than had been expected.

Investor confidence drove the markets for the remainder of the week as risk appetite rose on the back of the Fed minutes and European Central Bank’s monthly report. The ECB remained firm on their position describing EU interest rates as appropriate and saying that inflation expectations remain firmly anchored. GDP growth was expected to continue to rise at a moderate but uneven pace. The ECB made no mention of additional quantitative easing measure being introduced and supported recent fiscal consolidation measures announced by various E.U. member countries.

On balance the E.U. debt crisis is still of concern for markets but the recent trend has shown that Europe’s position is no longer significantly worse than that of other major global markets and thus saw the single currency appreciate across the board breaking recent ranges against the pound.

The dollar retraced some of its losses from last week as a lack of economic data and debt concerns ignited safe haven buying of the buck. Economic data for the week weighed on the dollar though as the figures were largely negative for the U.S. economy. The U.S. trade deficit increased to $42.3bln from $40.3bln in May while lower PPI inflation and to drop in industrial production numbers all added to the dollars weakening trend as the data began to indicate the U.S. economy was slowing. The Federal reserve Bank released the minutes from its last monetary policy meeting that were a lot more dovish than previous statements. The Fed confirmed that the outlook for the U.S. economy “softened somewhat” and that the FOMC “would need to consider whether further policy stimulus  might become appropriate if the outlook were to worsen appreciably” which led market to believe that the U.S. economy was indeed showing signs of slowing down. The impact on the dollar saw the euro advance to a 2 month high versus the greenback and pulled the pound higher as well. 

Next Week

There is plenty of crucial data for the U.K. this week but GDP figures on Friday will no doubt be the main event. Last week the Office of National Statistic released the delayed Q1 final growth estimates which was met with scepticism by traders, this week’s release is the first estimates on Q2 growth. Prior to the growth figures public spending and government debt figures will dictate sterling’s direction of trade although sentiment and the impact of investor confidence and EUR/USD levels cannot be discounted. The minutes from the Bank of England’s last monetary policy meeting will be released mid week and a split vote will not be unexpected as markets would consider MPC member Andrew Sentance to remain hawkish.

Last week saw the Federal Reserve Bank take a more dovish stance on economic forecasts and economic data supported this view by coming out mostly to the down side. Housing data and weekly jobless claims will thus be reviewed to determine if there is a trend in economic slowdown for the United States.

Economic Data Releases