Sterling Surges Despite IMF UK Growth Downgrade
The Pound surged against the Euro and the US Dollar, despite the fact that, in its latest World Economic Outlook report, the International Monetary Fund (IMF) downgraded the UK’s economic growth forecast. The IMF slashed the UK’s GDP growth outlook for 2017, but kept it stable for 2018. The report notes that the uncertainty about the outcome of the Brexit negotiations poses a threat to the global economy.
In contrast to the UK, the IMF upgraded its growth forecasts for the four largest Eurozone economies, which are Germany, France, Italy and Spain. The IMF’s report stressed that the US economy is facing problems because President Trump has failed so far to deliver the promised tax cuts and reforms. According to IMF economists, the global GDP will grow 3.5% in 2017 and 3.6% in 2018.
Pound Sterling – UK Markets
Today, Sterling rallied against the Euro, with the exchange rate set at €1.11. The Pound also strengthened against the US Dollar with the exchange rate set at $1.30. On Wednesday, data regarding the GDP growth in the second quarter of the year and the number of mortgage approvals in June will be published and are both expected to affect the British currency’s value.
As if the weak economic data coming from the UK wasn’t enough, the IMF delivered another blow to the economy. In its latest World Economic Outlook report, the IMF slashed the UK’s GDP growth outlook, by 0.3% to 1.7% for 2017, compared to April’s growth forecast. The IMF left its 2018 forecast for the UK’s GDP growth, unrevised at 1.5%.
The IMF’s statement said that one of the key risks that the global economy is facing is a potential failure in the negotiations between Great Britain and the EU. Regarding the revision of the UK’s GDP growth forecast, Maurice Obstfeld, the IMF’s economic counsellor said that it was based on the economy’s tepid performance and added that the impact of Brexit on the UK remains unclear. This was the first time that the IMF downgraded the UK’s growth forecast since the Brexit referendum.
US Dollar – US Markets
The US Dollar edged up against the Euro, with the exchange rate set at €0.85. Domestic politics and the Federal Open Market Committee (FOMC) meeting will be catching our attention this week.
In Wednesday’s Fed meeting, the central bank is not expected to announce any change in its policy. However, market experts will be waiting for the release of the Fed’s statement, after the meeting, which will outline its stance. According to Goldman Sachs, the statement will acknowledge that the balance sheet adjustment is closer at hand, while analysts at the US bank believe that the FOMC will announce the sheet’s normalisation in September.
The IMF cut its US growth forecast for 2017 and 2018 to 2.1%, from 2.3% and 2.5%, respectively. The IMF statement says that the major factor for the revision is that analysts expect that “fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and the nature of the fiscal changes in the US.”
Euro – European Markets
The Euro hit a two-year high against the US Dollar early in the morning before retreating to lower levels, with the exchange rate set at $1.16. IHS Markit published its manufacturing and services PMIs for the Eurozone, France and Germany.
The IHS Markit’s July survey showed that there has been a slight fall in the Eurozone’s PMIs, which its economists believe that “it shows that the Eurozone’s recent growth spurt lost momentum for a second successive month, but still remained impressive.” Experts suggest that the slowing pace of the economic growth and the easing of price pressures will relieve the European Central Bank’s (ECB) policymakers of the pressure of rushing into reducing the stimulus programme.
The same survey showed that the German private sector growth hit a six-month low in July. German companies reported that growth in manufacturing output slowed in the second month of the summer, despite the fact that there is strong demand from customers across Europe and Asia. On the contrary, French factories recorded their best month in the last six years, benefitting from an increased number of new orders. Markit’s analysts noted that French manufacturing firms are increasing their staff numbers in the quickest pace recorded in the last seventeen years.
Other Currencies – Highlights
Sterling slumped against the Australian Dollar, trading at 1.63 AUD. The Australian Foundation Investment Co. (AFIC), which is Australia’s largest listed investment company, published a statement in which it stresses that there is a number of risks to the health of the country’s economy and its business environment. “Heightened taxation risk from federal and state government has become a recent feature of the economy. Reforms are needed to create a more robust foundation,” said the statement. In its report, AFIC calls the tax imposed on the country’s five largest banks “an opportunistic approach to policy.”
The Pound rallied against the New Zealand Dollar, trading at 1.75 NZD. Despite the bad performance against the British currency, the Kiwi reached a ten-month high against the US Dollar. Analysts at Bank of New Zealand (BNZ) suggest that the Reserve Bank of New Zealand (RBNZ) will have to think about lowering its inflation forecast “by a reasonable amount” due to the Kiwi’s strength.