It’s not all gloom and doom in Europe, as we’ve mentioned in recent days. France appears to be on the road to recovery, but clearly of the cyclical variety, nothing structural has been implemented yet, and in a funny way this might just stop any chance of that. To the south, Spain’s economy has been growing at its fastest pace for 8 years according to the central bank, and the forecast for 2015 as a whole has been revised higher to 3.1%. Yes the unemployment situation is still horrific, but this can only be good news, and it’s surely a poke in the eye to the anti-austerity brigade, but I’m sure they have an excuse for this. Still, we can’t escape Greece unfortunately, and failure to reach a compromise yet again means that the saga continues until at least Saturday where another meeting of the eurogroup finance ministers is now billed as make or break. We shall see, but meanwhile EUR/USD remains in a consolidation formation moving in as tight a range as we’ve observed for quite some time. Chart patterns like this are inevitably followed by a move in the direction of the prior trend, so my instinct is to look for a decline in the currency pair when the consolidation ends. Watch this space.
The consumption numbers published yesterday in the United States painted a fairly rosy picture with consumers beating economist forecasts quite comfortably, and jobless claims continued their slow steady decline, pointing to steady improvement in the labour market, and naturally consumer sentiment. All great news, and all supportive of the idea that there is no reason for interest rate rises to be delayed much more. It really could be any of the next few meetings.
After months of consensus amongst the Bank of England policy makers it appears a hawk is raising his head again. Martin Weale recently suggested that the UK central bank should raise rates as early as August. Quite a turnaround, and if I was a bit more cynical, I might think that the UK economy is now being assessed purely on its own merits with no election issues clouding the picture. But nevertheless, he does have a point, the UK employment situation is easily as impressive as in the United States, theoretically there’s no reason why these two advanced economies shouldn’t move at around the same time. No reason I guess apart from the size and importance of the Eurozone economy to the UK I suppose. Now obviously there isn’t going to be a rate rise in August, but it is certainly a good thing to have the debate firmly back on the agenda. Wherever possible interest rates should be normalised, otherwise what are we going to do when we actually really need to cut rates?
We expect currencies to have a fairly gentle day today, barring unforeseen announcements. Our longer term view of a stronger greenback and pound sterling versus a weaker euro remains intact. We do however remain mindful, that there is room for a counter-trend move before the bigger picture dynamics reassert themselves.
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