Week Ahead: 16th July 2018
UK economic deluge to determine BOE move and GBP recovery
The pound will be in focus next week as the spotlight falls on a spate of monthly economic data releases, which could determine whether or not the Bank of England hikes interest rates at its meeting next month.
First up is the unemployment report for May and June. The market expects the unemployment rate to remain steady at 4.2%, however it’s the wage data and the employment change components that could impact the pound. 146k jobs were created in the three months to April, following 199k jobs created in the 3 months’ to March, this bucked a trend of weaker jobs growth in the 6 months’ prior. If we see a surprise slowdown in UK job creation then it could increase uncertainty around the August rate hike from the BOE and this may weigh on the pound.
Wage growth will also be in focus, after data in May showed the first decline since February 2017. Overall, wage growth remains muted, especially since the unemployment rate is so low. Thus, while a drop in wage growth could make the chance of a rate hike marginally less likely, a rise in wage growth is unlikely to boost expectations that UK interest rates will rise at a faster clip than what is already expected.
UK CPI data, released on Wednesday, will also be closely watched to see if core prices continue to moderate. The market is expecting a return to 2%, which would be the lowest level since March 2017. Interestingly, as the core rate of inflation falls, the headline rate is expected to start to climb once more. We think that this is mostly due to temporary factors like the oil price, which was weaker this time last year, so the BOE is unlikely to worry about runaway inflation on the back of a 2.6% headline CPI rate. Of more concern would be a weaker than expected reading of core CPI, if this slips below 2%, the BOE’s target rate, it could make it harder for the BOE to justify hiking interest rates in August.
Thursday sees the retail sales report. June is expected to be a bumper month for retail sales in the UK, with the monthly rate excluding fuel expected to rise by 0.3%, bringing the annualised rate to 3.9%. Although this is a touch below the 4.4% recorded for May, we believe that there is a chance that UK retail sales data could beat expectations due to the good weather, which may have fuelled sales of clothing, food and drink and leisure activities. Since domestic consumption is an important component of the UK economy, a stronger than expected sales report for June could become the most important factor that drives BOE rate hike speculation this week.
What about the pound?
The market already feels confident that the Bank of England will hike rates next month and the swaps market is pricing in an 80% chance of a 25 basis point hike to 0.75%. A good set of UK economic data is thus unlikely to boost expectations of a rate hike too much further. Instead all eyes will be on how the market interrupts this week’s data releases and whether it boosts the expectations for a further rate rise after August. Right now, the market is not anticipating a rate hike to 1% by year end, however, strong labour market data, rising headline inflation and a strong retail sales report, combined with the prospect of a softer Brexit, could see the pound benefit.
GBP has, so far, not received a boost from the pick-up in rate hike expectations and has lost more than 1% vs. the USD in the past month, it is also 0.6% lower vs. the euro. Thus, a shift in rate hike expectations further down the curve on the back of some positive economic data surprises this week may trigger a recovery in the pound. We think that EUR/GBP could be most at risk, especially if it breaks below the 0.8821 level – the 200-day sma and a key level of support. Below here opens the way to 0.87 then 0.8620 – the low of the last 12 months.
What else to watch out for:
15/07: China Q2 GDP, retail sales (June) and industrial production (June)
The market expects a slight moderation in annual GDP to 6.7% last quarter from 6.8% in Q1. The market will be looking closely at today’s data since it comes after the US trade tariffs on more than $200bn worth of Chinese imports to America. While it is too early for these tariffs to have an impact on the Q2 GDP data, any signs of weakness in the Chinese economy before the tariffs came into effect could lead to fears about the future of China’s growth. A weaker than expected number could cause jitters in Asian stock markets.
17/07 and 18/7: US Federal Reserve Chairman Powell delivers his semi-annual testimony to the US Congress
While Fed chiefs normally stick closely to their scripts when they deliver testimonies to Congress, the Q&A sessions can get interesting. The market will be looking to see if the Senators ask any questions about the potential for a fourth rate hike later this year (a third hike is expected in September). Powell could use this session to stoke further rate hike expectations or to dampen them, which could stoke movement in the dollar and US indices. Also watch out for any tone of caution from Powell regarding the economic impact of Trump’s trade sanctions on China and what this could mean for the economy moving forward. If the Fed chief sounds worried about growth then the dollar could struggle.
Spreads may widen surrounding important news announcements, during political uncertainty, unexpected events leading to volatile market conditions or at the open/close of the business day
and on weekends when liquidity is lower. To view our economic calendar please click here.