20141125 – ALL EYES ON U.S GDP

Good morning

At 13h30 (GMT) we will find out whether or not the US economy is continuing its present course or is it too suffering with the rest of the global economy. GDP for Q3 is expected to come in at +3.30% (3.50% for Q2). One has to think if the number is indeed as expected or better of course, the USD should/will renew its attack below 1.2355 lows, while if the number is lower than expected and a slowdown is in effect, the USD will weaken potentially through to 1.2525 (EUR) and 1.5850 (GBP). Excluding China for the purposes of writing this article, the U.S is the fastest growing western economy right now and as we all know from past experience, it is imperative that the U.S leads the way in global growth. The spin off effects for the rest of us are plain to see. It was only 3 months ago traders were betting the UK would jump the gun and raise rates in December/January. How quickly we forget and choose to forget. The FED is now proudly leading the pack again and I fully anticipate they will indeed be the first to pull the trigger on raising rates. However as the FED has repeated over and over again, they will not jump the gun and they will allow the markets to normalise and grow organically without official intervention. In other words the FED do not want to restart QE!!!

BoI left rates unchanged at 0.25% yesterday (as expected).  In line with global inflation, Israel’s CPI remains below their 1-3% target and the recent depreciation in the ILS will (hopefully) push inflation higher and more importantly help exports (as I mentioned yesterday). The CB is hoping that GDP numbers will rebound in Q4 given the cessation of conflict. What it certain is the Israeli CB is generally very proactive and therefore if in the new year inflation is still too low, do not be surprised to see ANOTHER rate cut (to 0.05%) allowing the ILS to weaken further in order to achieve their desired outcome. The issue all western economies are facing now is low inflation. So allowing your currency to weaken is certainly one way to fight back….

What about the GBP, well in 30 min (10h00) the Inflation Report is published by Gov. Carney. It is likely to have a major impact on the movement of GBP/USD if it comes out different to expectations. Inflation has been falling in the UK, and therefore his comments today could very well set the landscape for the rest of 2014. Tomorrow at 09h30 sees U.K GDP published at 09h30. U.K GDP has been stead over the past year (look at the strength of the GBP vs EUR) and the market is hoping for much of the same with a reading of 0.70-0.80% expected. Same outcome as I described above if the rate comes in above, below or as expected. I still feel very strongly about the medium to long term prospects for the GBP vs the EUR (NOT the USD!!!).  If I am completely honest, I think the way the GBP has fallen against the USD has been somewhat OVERDONE and as if it was being “manipulated” (there I said it). Are things really that bad that the GBP has fallen 10% against the USD in 3 months? Me thinks NOT, but then again what can I do about it other than write what I think.

Have a good day and good luck