It was a very quiet start to the week, with the first notable release being Tuesday morning’s German ZEW Economic Sentiment release. The survey printed an abysmal 8.6, far less than the 18.2 expected, and large fall from the previous month’s 27.1.
The influential survey has fallen for seven consecutive months and is now at its lowest level since December 2012. Germany’s reliance on Russian gas imports means the political tensions between Russia and the EU over the Ukraine are weighing heavily on business confidence. Following the release, EUR/USD dropped and traded as low as 1.3338.
Wednesday morning brought the release of the much anticipated quarterly BoE UK Inflation Report. The report upgraded the forecast for 2014 UK GDP growth from 3.4% to 3.5%, and estimated that the amount of slack in the economy had narrowed to 1%. This was where the good news ended, however, as the bank forecast that wage growth this year would be around 1.25%, half the May report’s estimate of 2.5%.
By Alex Edwards at UKForex, an international money transfer service
With this sluggish wage growth being compounded by last month’s jump in inflation, BoE Governor Mark Carney took the opportunity to play down speculation of a 2014 rate rise. Carney said that an increase wasn’t warranted at present, and even if the slack in the economy was used up overnight, the current 0.5% Bank Rate would be near the appropriate level. On the news, cable dropped from 1.68 to 1.6725 and fell away throughout the rest of the London session to dip below 1.67 for the first time since April. Unless there is rapid improvement in wage growth, it seems improbable that UK interest rates will be raised this year.
A hike in Q1 2015 now seems the most likely scenario. GBP/EUR, which had traded around 1.26 before the release, plummeted to a low of 1.2466. Later in the day, we had some disappointing US Retail Sales figures, with the core reading showing 0.1% growth when 0.4% was expected, and the overall reading coming in flat when 0.2% was expected. Cable briefly rallied on the release – however this was short lived and the pound’s sell-off continued throughout the New York session. US Unemployment Claims printed 311k, just missing the 307k estimate.
Thursday saw the eurozone take centre stage with a slew of economic data being released. First up, we had French prelim Q2 GDP which printed flat when 0.1% was expected. This was the second flat reading in a row for the eurozone’s second largest economy. Shortly afterwards, we had Germany’s Q2 GDP reading which also undershot expectations printing -0.2% when -0.1% was eyed. After a particularly warm winter, which saw the previous two quarters beat estimates, a bad number was expected but the recent turmoil in Ukraine has hit business confidence in the eurozone’s largest economy.
This, in turn, has affected output. At 10am, we had Final CPI from the eurozone which showed no change from the flash reading of 0.4%. At the same time we had eurozone GDP for Q2, which came in flat when 0.1% growth was expected. Germany’s drop in output is expected to be temporary given their structurally sound economy, however problems are likely to persist for Italy and France, which could affect the markets as we head into winter, especially if Mario Draghi’s latest stimulus package fails to lift inflation. EUR/USD, which had unexpectedly jumped with the CPI and GDP release to test 1.34, retraced as the day went on and traded under 1.3370 for the rest of the day.
This morning has seen the second estimate of UK Q2 GDP print 0.8%, unchanged from the first estimate. The year-on-year figure, however, was revised up slightly to 3.2%, from 3.1% in the preliminary release. Cable remains under 1.67 at present and, with little high-impact data out today, will probably remain under the big number for the rest of the day. EUR/USD sits at 1.3380.
Next week’s key releases include UK and US CPI numbers on Tuesday. Wednesday morning sees the release of the minutes from the latest Bank of England MPC meeting – there is speculation we may finally see one or two votes in favour of an interest rate hike.Wednesday evening brings the release of the last FOMC meeting minutes. Thursday sees the monthly PMI results from the eurozone, Retail Sales numbers from the UK and the start of the Jackson Hole Symposium. Friday sees Janet Yellen and Mario Draghi speak at the Symposium on Friday.
Further reading: EUR/USD Stalls within Strong Bearish TrendGet the 5 most predictable currency pairs