In a short while, this morning, we’ll get Q3 GDP data for the United Kingdom. Economists are expecting an unchanged number of 2.3% for the previous quarter. There might be some currency market fluctuation if the data surprises either way, but the truth of the matter is that this data is lagging. We are already two thirds of the way through Q4, so looking back at the numbers for Q3 will not give you much of an indication of what’s in store for the British economy going forward. Of far more relevance, was the Chancellor’s Autumn statement, which continued the stated aim to reduce the size of government’s share of gross domestic product. It’s no surprise that there will be reductions in real spending, it is only to be hoped that the private sector picks up the baton, and enables the UK economy to continue to post solid growth numbers. It is clear that reductions in fiscal expenditure will enable the Bank of England governor to take a more relaxed approach to interest rate hikes, sterling might end up being a bit weaker than it otherwise might have been, but this is all long term stuff.
Some mixed data in Japan, with unemployment falling to a 20 year low – good! – but inflation falling as well – bad!? I say “but”, because this is counter to the wishes of the Bank of Japan. I’m sure the huge number of pensioners in Japan aren’t crying about it though. But clearly the Japanese central bank would love to inflate away part of the huge government debt burden. Contrast the unemployment data in Japan, with the sobering news that unemployment rose to the highest levels since 2013 in France. Japan and France are two economies with vastly different structures obviously, so close comparisons are probably unfair. But there have been signs of stabilisation in the last few months in France. Perhaps this is just the dark before the dawn, but clearly news like this will only encourage those on the board of the ECB who would like to take more aggressive steps with the ongoing quantitative easing programme.
Later on this morning we’ll get more business and consumer surveys for the Eurozone, which will help give us more clarity about economic conditions in the Eurozone. I continue to maintain that the fate of EUR/USD will depend as much on additional QE programmes in Europe as it will on interest rate rises in the United States. It is difficult to get a sense of how much expectations are getting built up, but there is always a risk of strong reversals if surprises are large enough. For now, we continue to look for new 12 month lows for both EUR/USD and GBP/USD in the coming months, so it’s quite clear where we stand. Looking at GBP/USD in particular, the currency pair appears to be coiling, the energy build that results from this sort of range bound behaviour usually ends with an impulsive move in the same direction as the prior trend. That would mean a big move lower then. Some technical analysts who are seeing the charts in the same way as me, are going as far as to suggest that the end result will be GBP/USD reaching the 1.43/44 zone in the next few months. If this turns out to be correct, data like today’s UK GDP report might be part of the reason for it. So let’s see what happens…
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