Sterling ignores strong GDP numbers, Swedish Krona slumps

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28 October 2016

thomasdodds

The Pound declined sharply against both the US Dollar and the Euro on Thursday afternoon, with investors paying little attention to yesterday’s solid GDP numbers that suggested the UK economy was in decent health despite the pending Brexit.

S
terling had initially spiked after growth in the three months to September came in above expectations. The UK economy grew by 0.5% in the third quarter, compared to the 0.3% estimate. Unsurprisingly, the UK’s dominant services sector contributed almost the entirety of the expansion, with agriculture, production and construction output all declining.

However, relief for the Pound was short lived, with the currency falling sharply in afternoon trading as lingering political uncertainty continued to provide a drag on the currency.

Despite the large decline in the Pound, it was the Swedish Krona that ended the day as one of the worst performing currencies in the world, slumping by close to 2% against the US Dollar and in the process falling to its weakest position against the Greenback since March 2009. The Krona was left reeling after Sweden’s central bank, the Riksbank, explicitly signalled that another interest rate cut and further quantitative easing is on the horizon.

The main event in the market today will undoubtedly be this afternoon’s third quarter GDP numbers in the US. Expectations are for 2.5% growth year-on-year, although we now look for a stronger reading around the 3% mark after the surprisingly impressive trade data released earlier in the week. Any number north of 3% would provide solid support for the Dollar today.

Earlier on Thursday, the Dollar soared against its major peers, in particular the Japanese Yen, which fell to a three month low. Expectations for an interest rate hike by the Federal Reserve before the end of the year remain high, helped in part by yesterday’s solid jobless claims and durable goods orders data.

Major currencies in detail:

GBP

Sterling depreciated 0.3% versus the USD during the course of London trading on Thursday.

Finance Minister Philip Hammond spoke following the release of the GDP numbers yesterday, suggesting that a slowdown in the UK economy could be on the way next year as Britain enters into a period of heightened uncertainty.

Meanwhile, retail sales according to the Confederation of British Industry showed resilience in October, growing at their fastest pace since September 2015. The overall CBI Distributive Trades survey rose sharply to 21 this month from -8 recorded in September.

With no economic news whatsoever today, investors will turn their attention to next week’s Bank of England meeting.

EUR

The common currency was mostly range bound throughout trading yesterday, with little significant economic announcements in the Eurozone. The Euro ended 0.2% lower against the Dollar.

A number of officials from the European Central Bank spoke on Thursday including members Visco, Nowotny and Mersch. Visco talked about concerns regarding low inflation and growth in the Eurozone, while both Nowotny and Mersch commented on the limitations of monetary policy and the side effects of low interest rate rates.

Given there was no direct monetary policy implications from these comments, the Euro was little moved by the remarks. The strength of the Euro today will be determined by Friday’s US GDP report.

German inflation numbers for October this afternoon are expected to show a modest improvement. The Euro will, however, likely be driven by news elsewhere.

USD

Sharp gains against the Pound, Aussie Dollar and Swedish Krona sent the Dollar index 0.3% higher yesterday.

Durable goods orders came in mostly in line with expectations and did little to materially shift expectations for the next interest rate hike by the Federal Reserve. Orders fell 0.1% in September, although this was made up by an upward revision in the August numbers.

Initial jobless claims continued to point to a strong labour market performance in the US. Claims fell slightly last week to 255,000 from a revised 260,000, and remain just shy of a four decade low.

Third quarter GDP numbers at 13:30 UK time today will be the last major economic release ahead of Wednesday evening’s Fed meeting.

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