Daily Market Brief 14 August 2017

Data releases to Drive short term direction for Sterling

August 14th: Highlights

  • Inflation and employment reports due this week
  • Benign U.S. inflation hits dollar
  • Eurozone inflation and Growth data to confirm Euro strength

U.K. data to confirm market concerns

The U.K. employment data which will be released on Wednesday will be hailed by the Government as a testament to how their policies are providing jobs. Were that to be true, and employment was at its highest for 30+ years, then the current softness of wages data wouldn’t exist and real wages would be in positive territory.

Employment is the most highly emotive monthly statistic for the public as it is the one the man in the street can most relate to. The inclusion of various schemes that are introduced to massage the data; part time work, zero hours contracts, the gig economy and Government sponsored training schemes for the young are all just window dressing.

This is nothing new, successive Governments have recognized the need to continue the illusion but the accompanying wages data tells the real story.

Hourly earnings are expected to have risen by just 2% in July, well below the expectation for an economy where unemployment is just 4.5%. With inflation running at anything between 2.7% and 3% real earnings are falling which is a major concern to the MPC.

Sterling is struggling to retain the 1.3000 level against the dollar while versus the single currency it has renewed its downward path reaching 0.9121 on Friday.

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Dollar falls as inflation data removes rate hike hopes

The size and diversity of the U.S. economy makes timely yet accurate data extremely difficult to both produce and predict. The desperation with which the administration releases the employment data on the first Friday of the month is testimony to that fact. The timing is far more important than the accuracy with, up to, 25% revisions common.

Friday’s inflation data which showed prices rose by just 0.1% in July and by 1.7% year on year isn’t subject to revision. Inflation has apparently reacted well to rate hikes falling from a peak of 2.7% in February. This is the only part of the economy that has reacted in such a visible way leading to questions over the accuracy of the data. It is likely that the “basket” of commodities used to create the data has become outmoded and is due for update.

Analysts can only work with what is put in front of them and Fridays data has all but removed the possibility of a further rate hike this year.

The dollar index, which has fallen by close to 10% this year, has steadied a little recently as the Euro has paused on its journey towards 1.2000 but any solid turnaround hinges upon a viable stimulus package being produced by President Trump in the coming months.

Euro to gain further as region avoids economic pitfalls

To use currency strength as a warning of a coming slowdown as exports become more expensive is a sure-fire indicator of “damning with faint praise”. The Eurozone has emerged from potential political, banking and economic crises unscathed and is now in a period of slow but consistent growth and benign inflation.

This week the final revision of regionwide GDP will be released and it will show that growth was at 2.1% in the second quarter.

The ECB has treated the economy with benign neglect over the course of the first half of the year, resisting any calls for a pre-emptive rate hike. President Draghi has been consistent in his belief that he must provide a level playing field to all nineteen economies that make up the single currency.

Slower growth here, higher inflation there have, by necessity, been left to level out as the “experiment” provides the basis for each economy to get into line. High inflation, high interest rate economies like Spain and Italy have effectively become more like Germany, Holland and Belgium although those three have been forced to be a little looser in their own policy expectations to accommodate the transition.

This week’s events of note

U.K. inflation and Employment data will be the focus for Sterling. North Korea should make more headlines

  • Japan: GDP – The Japanese economy is growing at around 2.6% YoY but continued low inflation means rates continue on hold
  • Eurozone: Industrial Production – Driven on by German growth, regionwide data should show a healthy increase. Possibly by as much as 1.5% YoY
  • Australia: RBA Meeting Minutes – How close was the RBA to a hike. A cooling economy is balanced by a property market that is steaming ahead fuelled by Chinese money
  • Germany: GDP – Sr. Draghi takes little notice of individual economies data (apparently) but will probably make an exception. Close to 2% YoY is possible

  • U.K. : Inflation – Producer prices should have cooled a little but consumer data could see a move back towards 3% following last month’s out of line fall.
  • U.S. : Retail Sales – Back on track at 0.4% following June’s fall

  • U.K. : Employment Report – Average earnings data taken over from the (spurious) headline figure as the most important part of the data
  • Eurozone: GDP – A further read on the regions Q2 growth
  • U.S.: FOMC Minutes – Was the unchanged vote unanimous

  • Eurozone: Inflation – Likely to remain benign at 1.2% YoY

  • No Important Data:

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”