One of those big data announcements comes this morning – UK GDP. We all saw the market’s reaction to disappointing data last week with British retail sales. GBP dropped hard in the wake of the data disappointment, a clear indication that the market over-owns GBP. In addition, there is already talk in the papers about how much the strength of sterling has harmed manufacturers. Today, provisional GDP numbers for Q2 are forecast to show a small dip from 2.9% for Q1 to 2.6% for Q2. It will be very enlightening to observe the market response to a deviation from the expected outcome. Either way it will be most instructive. After the decline at the end of last week, GBP/USD has made what looks very much like a corrective bounce, retracing a perfect 61.8%, experience suggests that any disappointment today could lead to a capitulation of GBP longs. Please look out for our tweets if the surprise (if any) is significant.
It feels very much like the dollar is set to strengthen today. All the majors are ever so slightly weaker against the greenback, and the Russian rouble is already over 1% weaker versus the dollar this morning. The latter is almost certainly being influenced by the continued decline in the oil price, which is approaching what looks like a significant interim support level at around $52.50 (Brent).
We got some strong German confidence data yesterday, which didn’t do the euro any harm, the single currency was already having a decent day, but must surely have received a boost when Germany avoided yet more bad data. You’ll note that in recent months the good news among the Eurozone countries has come from the likes of France, Italy, Spain and Ireland. If there is any hope that Europe can grow out of its current crisis, a strongly growing Germany is surely a pre-requisite. EUR/USD traded above 1.11, but has dipped back below this morning. We will see if the greenback takes back more of its recent losses today.
Even some slightly disappointing data may not do much to dissuade Yellen and Carney. I can only imagine the central banks of the United States and United Kingdom are extremely keen to normalise monetary policy as soon as they are able, and move on past the disaster that was the 2008 Global Financial Crisis. For the lessons of being stuck near the zero bound, both central banks only need to look towards Japan. Durable goods data yesterday afternoon from the United States can only have given Ms Yellen more confidence about rate rises in the U.S. The numbers were a solid positive surprise, and the case for moving to a brave new world of higher interest rates is only growing stronger.
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