Let’s start with some good news and news that will make PM Tsipras green with envy (and proves that AUSTERITY and belt tightening works!!). Spain’s economy grew in the third quarter at the fastest annual rate since the 2008 financial crisis. The EU’s fourth-largest economy grew handsomely at 3.4% in the July-to-September period compared with the year earlier, up from 3.2% in the second quarter. On a quarterly basis, the economy did slow slightly, expanding 0.8%, compared with growth of 1% in the second quarter. While both readings were in line with estimates it indicate Spain is on track to record its strongest economic performance this year since 2007. The statistics office showed internal demand accounted for much of the momentum in the quarter, driven by a recovery in domestic spending. What this means in a nutshell is since 2008 Spain has embarked on a period of budget cuts, income (tax) recovery, and most importantly austerity. All this has meant the economy has bottomed and is enjoying a period a positive and healthy growth (in line with the US and higher than UK). Perhaps other EU member states should acknowledge that the short term pain has now led to the start of what we hope is long term gain.
Overnight, in an article published by Reuters, the ECB is considering options such as a two-tier system for charging deposits or buying bank loans at risk of non-payment ahead of December’s meeting. At the next monetary policy meeting on 3 December, the market is expecting a potential 0.10% cut in the deposit rate and a time extension of QE, as well as some changes in the parameters of QE, including the removal of the yield floor for government bonds. The EUR (USD) as a result fell over 50 pips and is currently trading just north of 1.0600 with Europe now taking over there is a likelihood we could see (and should see) further USD gains vs the EUR as the desire to hold the latter wanes. I have noted previously I think as we head towards both the 3rd Dec (ECB) and 16 Dec (FED) meetings the EUR will come under increasing pressure. Should the FED indeed hike rates i would expect to see profit taking before a resumption in the USD rally as traders then ask “when will the FED hike again”.
GBP(USD) trading sideways in a tight 1.5050-1.5150 range as traders focus on the EUR. having said that it is only a matter of days when I believe we should see the GBP(USD) fall through the 1.50 barrier en route to the year’s low 1.4569 (ish). After yesterday’s interim budget, it looks like real wages could stagnate as the Chancellor attempts to balance the books and create a budget surplus (2020?). I am struggling to find a reason to BUY the GBP (USD) and if the above (EURUSD) plays out, I would expect the GBP to follow. However vs the EUR, the GBP has been mixed. Trading sub 1.4285 (0.7000) briefly it rallied back to over 0.7060 before the new story broke overnight. Currently trading at 0.7030 (1.42) I think the GBP is still on course to properly break 0.7000 and trade stronger.
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