Sterling declines after IMF slashes UK economic growth forecasts

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20 July 2016

Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling fell across the board on Tuesday, with concerns regarding the health of Britain’s economy looming large, after the IMF downgraded its growth forecasts for the UK economy.

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nsurprisingly, the IMF cited uncertainty over Britain’s impending exit from the European Union. The UK economy is now projected to grow by 1.7% this year and just 1.3% next year, a significant 0.9% downward revision from its pre-referendum expectations. The IMF also slashed its global growth forecast for the fifth time in the past 15 months from 3.4% in 2017 to just 3.1%.

The Pound had earlier brushed aside an impressive set of inflation figures for June. Headline inflation rose by 0.5% in the year to June, with an increase in the price of flights and fuel nudging the figure to its highest reading in over a year. However, this will provide little comfort for the Bank of England, which looks increasingly likely to cut interest rates next month in order to prevent a sharp slowdown in economic growth.

The next main economic release on the horizon will be this morning’s labour report in the UK. We usually pay particular attention to earnings data, although this will likely be overlooked given its timing before the Brexit result.

Meanwhile, the US Dollar rallied to its strongest position in four months against its major peers, with more impressive housing data underlying the strength of the US economy at present.

This sent the Euro to its weakest position against the US Dollar in three weeks, with investors in a cautious mood ahead of Thursday’s European Central Bank monetary policy meeting, the first since last month’s Brexit vote.

We also saw a sharp sell-off in both the Australian Dollar and New Zealand Dollar yesterday after a dovish set of minutes from the RBA that hinted at an interest rate cut in Australia as early as next month.

Major currencies in detail:

GBP

Sterling fell 0.8% yesterday, with investors increasingly concerned about the economic impact of June’s Brexit vote.

As well as the main measure of inflation, core consumer price growth also beat expectations yesterday, rising 1.4% versus the 1.3% expected. However, the boost to Sterling proved short lived following the IMF’s damning assessment of the UK economy.

Rating’s agency Moody’s also warned that the UK economy is likely to slow significantly in the near-term, with medium-term growth prospects materially weaker should the UK fail to reach a new trade arrangement with the EU.

Today’s labour report and tomorrow’s retail sales figures are unlikely to be big market movers. Friday’s manufacturing and services PMIs will dominate this week given that they will show the first signs of the economic fallout post-Brexit vote.

EUR

The Euro depreciated 0.4% yesterday, falling to its weakest position against the US Dollar so far this month.

The ZEW economic confidence indexes all came in much worse than expected on Tuesday, reflecting a significant fall in sentiment following the UK’s referendum. The main sentiment index for the Eurozone fell to -14.7 from 20.2, while German sentiment fell to its weakest level since November 2012, declining to -6.8 from 19.2.

This is a significant blow to the Eurozone’s economic outlook and does not bode well for third quarter economic growth in the currency bloc.

This Thursday’s ECB minutes will be the focal point this week. This morning’s current account data is unlikely to move the Euro today.

USD

The Dollar experienced another very good day on Tuesday, rallying against almost every major currency as investors bring forward expectations for the next interest rate hike in the US.

Economic data out of the US continues to exceed expectations, fuelling speculation that the Federal Reserve could hike rates as soon as December. Housing starts in June increased more than expected, rising to 1.189 million from 1.135 million, while building permits rose above forecast to 1.153 million.

This strong data echoes comments from Fed policymakers of late, which appear to suggest that they’re less worried about the outlook for the domestic US economy than some had previously feared.

The US economic calendar is relatively light over the next couple of days. Attention will instead shift to tomorrow’s ECB meeting.

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