GBP Finds Optimism, EUR Faces ECB Debate, USD Treads Carefully on Economic Data

GBP

Sterling discovers some optimism as the UK manages to avoid an economic decline in the third quarter. However, the UK’s economic outlook isn’t great due to the rising cost of living, higher borrowing costs, labour market challenges, and ongoing price pressures. Increased borrowing costs have impacted the housing sector, with home asking prices falling the fastest in five years, as reported by UK property website Rightmove.

In Q3, Total Business Investment took a hit, dropping by 4.2%, more than the expected 3.5% decrease. This contrasts with Q2 when firms increased spending by 4.1%. The drop in business investment isn’t good news for Q4 GDP, signalling that businesses are less confident in both local and global demand.

Chief Economist Huw Pill warns that keeping interest rates high to control inflation might lead to an overly slow economy, hinting at possible rate cuts around mid-2024. BoE’s latest projections foresee a flat economy for the next two years, with a modest 0.1% growth in 2026.

Recent factory data for September shows no growth in Industrial Production and slower Manufacturing Production growth at 0.1%, missing the expected 0.3%.

The Pound’s future this week depends on Tuesday’s labour data. The Unemployment Rate is expected to stay at 4.2%, and the Claimant Count Change for October rises by 15K, down from September’s 20.4K.

Investors are also watching wage data for July-September, a big factor in UK inflation. Average earnings (excluding bonuses) are expected to ease to 7.7%, and with bonuses, wages may soften to 7.4%, down from 8.1%.

EUR

Despite Fed Chair Jerome Powell’s hawkish remarks on Thursday, EUR|USD has held steady around the 1.0660 region, suggesting a relatively calm and range-bound week. GBP|EUR remains locked in downtrend is currently at around 1.1460.

The eurozone’s focus this week centres on the preliminary Q3 GDP release, expected to confirm a -0.1% quarter-on-quarter contraction. Additionally, ZEW survey expectations for both the eurozone and Germany are anticipated to see a slight uptick.

A lineup of European Central Bank speakers is scheduled for the week. While they might hint at another rate hike in this cycle, the market sentiment is shifting towards the possibility of three ECB cuts in 2024. This shift raises concerns about the potential for EUR|USD to rally next year if the ECB moves to cut rates as swiftly as the Fed. Challenges loom over our cautiously bullish outlook for EUR|USD in the coming year.

USD

GBP|USD continues its upward momentum for the second consecutive day, hovering around 1.2230. The pair possibly found upward momentum thanks to the positively surprising preliminary Gross GDP data from the UK released last Friday, coupled with a softening US Dollar.

The upcoming focus in the market centres on the October US CPI release, with particular attention on US retail sales. Should these figures come in weaker than expected, there’s a possibility of the Dollar edging towards the lower boundaries of its recent trading ranges.

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