Talking Points
EZ GDP higher than expected at 2.4%
UK PPI sees little pass through
No US data today
With Japan on holiday the yen proved to be the weakest major tonight as most of corporate order flow from Asia was absent. The EUR/USD however was able to muster a small gain on the back of slightly better than expected GDP growth figures. EZ growth expanded at the fastest pace in nearly six years in Q2 helped in no small part by the World Cup tournament which was hosted by Germany, the regions largest economy. The report printed at 2.4% versus 2.3% consensus but the EU commission did not revise the forecast for Q3 and Q4 leaving it unchanged at 0.5% and 0.8% respectively. Overall, tonights news is consistent with ECBs gradualist approach of slow and steady rate hikes and essentially reaffirms market expectations of further tightening from European monetary officials.
In UK the economic news was not as friendly to pound bulls with sterling trading below the 1.8900 level after PPI data showed muted pass through of price increases. PPI input data jumped to 1.1% from 0.9% expected but the gains did not translate into a rise in PPI output values which increased a far more modest 0.2% against 0.3% expected. That data shows that UK producers have limited ability to set pricing and is suggestive of soft economic demand. The UK calendar carries a significant amount of event risk this week with CPI, BOE minutes and employment data still to come.
As we noted in our weekly note, We remain dubious as to the idea of further rate hikes by the BOE this year believing that the action two weeks ago was a one off event. The UK economy remains relatively fragile and is unlikely to absorb further rate increases without suffering a serious slowdown. However, if the data this week proves better than expectations, it will vindicate cable bulls and may restart the pound rally, as the idea of yet another rate increase from the BOE will be given much more weight by market participants.
