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The Marketplace - August 11th 2014
11/08/2014
The US Dollar moved higher in a week that saw mounting geopolitical fear and lots of talking points for future monetary policy. The US economy showed its strength with an excellent ISM Non-Manufacturing PMI release climbing to 58.7, the employment component up and weekly jobless claims below 300,000 once again. The Euro suffered last week from ECB President Draghi’s comments, weak German data and an Italian recession.
In the UK, all eyes will be on wednesday's inflation report, as some observers believe that the MPC may be about to announce a change in its reaction policy, subtly moving to place more emphasis on nominal wages as a key determinant of interest rate increases.
GBP
The UK can expect to see a number of key trade data releases this week that starts with this month's UK employment data, Mark Carney's speech, the inflation report, and Friday's second estimate for UK GDP. The employment report will shed further light on how the degree of slack in the UK economy is progressing.
The Bank of England is set to update the markets on its view of spare capacity in the labour market at its quarterly Inflation Report this Wednesday. Any sign that the monetary policy committee feels more slack has been absorbed would suggest rises to interest rates sooner rather than later. Since the last report in May, wage growth appears to have been much weaker than the Bank had anticipated, whereas growth and employment data have beaten expectations.
Key labour market figures from the Office for National Statistics are expected to show that unemployment has taken a further fall, and nominal earnings growth is set to go negative. Also on this week’s agenda are the ONS’ second growth estimate for the second quarter of this year and Rics data on housing market strength.
USD
Sterling lost further ground to the US Dollar last week as geo-political concerns, a lack of outperformance for UK trade data and solid US economic data weighed heavy on the pair. On Wednesday, the latest US retail sales number is set to be released and the measure is forecasted to have likely softened to an increase of 0.1% in July, with retail sales ex-auto rising 0.3%. Retail petrol prices dropped 2.2%, negatively impacting gas station receipts and the substantial drop (to -3.2 from 19.0) in the Texas Retail Outlook survey also suggests a dent in July sales.
This week's unemployment claims number on Thursday is forecasted to show the number of initial jobless claims reach 307,000. The number fell by 14,000 last week to a seasonally adjusted 289,000. The reading was well below the 305,000 forecast by analysts, indicating the US labor market continues to improve strengthening the US economy. The four-week average declined 4,000 to 293,500 which is the lowest average since February 2006.
Much of the focus for the US Dollar will centre around geo-political concerns and their impact on the Eurozone recovery and emerging market economies that could help to prop up the world's reserve currency if problems persist. Friday's producer prices index is expected to show a marginal increase of 0.1% suggesting inflation remains tame enough to keep monetary policy 'ultra-easy'.
EUR
The focus in Europe could remain on near-term risks to the economic outlook, in relation to recent geopolitical events and trade data. The latest set of data disappointed massively relative to expectations, notably in Germany, France and Italy. With no clear fix to the diplomatic crisis with Russia in sight, the repercussions of the sanctions, on both sides, remain highly uncertain. Taking these downside risks to growth into serious consideration, the ECB left policy rates on hold while hoping that the ongoing easing in monetary conditions will filter through lower borrowing costs and credit conditions.
Tomorrow's German ZEW economic sentiment number is expected to fall once again as Eurozone concerns indicate a shift towards a domestically driven recovery in Germany. On Thursday, after Italy entered a recession and German industrial output disappointed, all eyes are on Germany's GDP number. The German economy is expected to squeeze by 0.1% in Q2 after growing very nicely at 0.8% in Q1. France is expected to grow by 0.1%, the same as all of the eurozone with a small miss in German numbers possibly resulting in no growth for the region.
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