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Strong UK GDP numbers bring the focus back to the Bank of England

By Hamish Muress

The week really peaked yesterday as the UK’s GDP figures were released. GDP beat expectations and this will have provided a reprieve for Governor of the Bank of England, Mark Carney, and his colleagues. Carney has been hinting that there could be an interest rate rise in the ‘coming months’ and with GDP beating expectations, albeit only slightly, this should provide the Bank with the green light it needs. The pound jumped in the morning following the release and the market is now pricing in an 80% chance that rates will rise from 0.25% up to 0.5%. Any potential rise next week will not necessarily be the start of a series of hikes, but rather a move out of the current ‘emergency mode’ and crucially providing the central bank with some capacity as the Brexit 2019 deadline comes around. Brexit Secretary was also testifying in front of Parliament yesterday and most interestingly the Department for Exiting the European Union reiterated that the Brexit deal will be voted on by both the House of Commons and Lords before the European Parliament then votes.

Over in the US, core durable goods released for September much better than expected but it was a mixed day for the US dollar as it lost ground against a number of its European counterparts. The back end of the week is heavily weighted with unemployment claims out this afternoon before the high tier US GDP figures on Friday. 

Yesterday saw Germany’s prominent Ifo index rebound at a staggering rate for October. The index hit an all-time high which is even more impressive given the poor numbers reported in September and August. Even the uncertainty of the German election has not been able to dampen German business and consumer expectations. For the Euro, the whole week will be focussed on today’s ECB monetary policy announcement and press conference at lunch. President Mario Draghi is widely expected to announce the beginning of tapering for his massive quantitative easing programme. At the moment the ECB purchases €60bn of mainly government bonds each month, scheduled until the end of 2018. The key questions will be by how much will Draghi cut these purchases, what specifically will he cut and what are his timeframes? There are a number of scenarios and possibilities which could all have varying impacts on the performance of the Euro. Having learnt from past mistakes, Draghi is very conservative so one of the most likely scenarios is to reduce the asset purchasing programme by around €20bn each month but commit to the programme all the way to the end of 2018. 

The Australian Dollar continues to struggle and did not manage to claw back any of the losses from the woeful inflation figures. Export prices came out overnight and it was not good news again. Whilst import prices have fallen the price of Australian exports also dropped 3% for the last quarter. 

New Zealand politics has been at the fore for a while and this is likely to remain the case for some time to come. However economic data still remains a key focus and overnight the country’s latest trade balance release missed the mark, showing that the deficit has widened once again.