Sterling suffering from last week’s disappointing UK growth figures

Publication date: 6 August 2012
Author: Richard Driver, CaxtonFX

Last week’s busy calendar was rounded off by the closely watched monthly US unemployment update, which came in well above expectations and gave market sentiment a considerable lift. Sterling continues to suffer from last week’s disappointing UK growth figures, which could well be a sign of things to come.

The week ahead brings the Bank of England’s Quarterly Inflation Report (Wednesday) and an interest rate decision from the Reserve Bank of Australia (early tomorrow morning). Today we only really have some comments from Ben Bernanke to look forward to.

STERLING/EURO: Sterling looking vulnerable as weak outlook for UK growth in Q3 begins to take its toll.

• Last week’s UK PMI figures for July were on the whole very disappointing; the manufacturing sector contracted sharply and the services sector slowed down to an 18-month low, though the UK construction did bounce back a little. Doubts over the expected boost to UK GDP in Q3 as a result of the Olympics are starting to hurt the pound now and downside risks are increasing, even against the euro.

• Spanish bond yields have pared back from the dangerous 7.0% level and the euro has been free to rally. This pair is trading just above €1.26 and short-term risks are skewed to the downside.

STERLING/US DOLLAR: Sterling remains at decent levels against the US dollar, as US non-farm payrolls lift risk appetite.

• The US non-farm payrolls figure came in at a surprising six-month high, though the unemployment rate edged higher to 8.3%. Overall the jobs update was taken extremely positively and stocks and other risky assets rallied. However, the improved state of the US labour market will not by itself convince the Fed that QE3 will not be necessary.

• Sterling is trading up at $1.5550 despite Friday’s disappointing UK services sector growth figure. We expect sterling to have a tough time against the US dollar in the coming month. The scope for a dovish Bank of England Quarterly Inflation Report and weak UK manufacturing production data highlights this pair’s downside risks in the coming sessions.

EURO/US DOLLAR: The euro is trading at a one-month high though should run into plenty of resistance before turning lower.

• Stocks rallied and the dollar weakened on Friday as the US jobs figures boosted sentiment. Once the dust settles though, the US dollar should stand to benefit from this rare but important piece of good news from the world’s largest economy. We expect any further rallies for EUR/USD to been seen as good opportunities to sell the euro, which in light of last week’s disappointing inaction from the ECB, continues to face major risks.

• The euro is currently trading at $1.2350 and we expect the dollar to retrace some of Friday’s losses today.

STERLING/AUSTRALIAN DOLLAR: The aussie dollar continues to shine ahead of tomorrow morning’s RBA interest rate decision.

• Sterling continues to struggle against the popular AUD as the market turns its head towards tomorrow morning’s monthly interest rate decision from the Reserve Bank of Australia. We are in line with market consensus in expecting no change to the RBA’s 3.50% interest rate. We are not expecting much new in terms of the RBA’s statement either, though this Friday’s quarterly monetary policy statement should highlight improved aussie growth prospects.

• This pair is trading down below 1.48 and it is tough to see GBP bouncing back against the aussie this week.

STERLING/NEW ZEALAND DOLLAR: The kiwi dollar was a top-performer last week, propped up by Friday’s strong US labour figures.

• Regional risk appetite made strides last week and this pair is trading at a five-month low close to 1.90 now. Sterling has been weak almost across the board but this pair’s latest downturn has more to do with positivity towards the kiwi dollar.

• The main domestic event for the kiwi dollar this week is Wednesday night’s NZ employment update, which is expected to be pretty decent. This pair trades at 1.91 and looks set to remain under pressure.

STERLING/CANADIAN DOLLAR: Support for this pair kicked in at 1.5550 but lower levels look likely this month.

• The news was positive for the loonie last Friday, with the US jobs market seeing some progress and US manufacturing coming in higher than expected. However, sterling enjoyed a much needed bounce off support levels down at 1.5550. Nonetheless, we think this will prove to be only a temporary reprieve for the pound.

• Sterling is trading above 1.56 this morning but looks poised for lower levels, particularly if risk appetite continues to rise.