While Friday’s UK construction data suggested that Q4 GDP may not be quite as bad as had previously seemed likely, there is still precious little reason to like sterling. The Bank of England is trying to talk it down, the case for seeing it as a safe haven relative to the EUR is declining as EU tail risks are reduced, and the AAA rating is under review. Sterling may still be seen as a relative safe haven compare to the USD if there is no fiscal cliff progress, but expect an upside bias to EUR/GBP to continue, with 0.8170 the main resistance area.
Its a busy week for UK data. Lloyds TSB forecast a modest rise in CPI inflation to 2.8%, as utility tariff hikes start to be included. Coupled with higher food price, inflation is forecast to rise to around 3% over the next six months. They expect November’s retail sales to rise modestly by 0.3% following October’s drop, but the trend on the high street looks set to remain soft in the run up to Christmas. Moreover, the final estimate of GDP could see a modest downward revision in Q3 growth to 0.9% from 1.0%, reflecting weaker growth in industrial activity. In combination, this suggests a soft end to 2012 and we will watch Wednesday’s MPC minutes to see what influence this had on the Committee’s thinking in December. Lloyds TSB expect a slow start to next year, but forecast gradual acceleration to deliver 1% growth for 2013 as a whole.
Although today is absent of any key data releases this does not mean that it will be a quiet week for markets in the lead up to Christmas. Following yesterday’s Japanese elections markets will be digesting what this could mean for future monetary policy and the Bank of Japan’s role. In the lead up the opposition leader Mr Shinzo Abe was critical of the Bank of Japan’s cautious approach to boosting economic growth and its failure to solve the problem of deflation, demanding that the BoJ accept a 2% inflatioin target set by the government , double the central bank’s 1% target.
Meanwhile the upcoming US ‘fiscal cliff’ will continue to weigh on markets. With the deadline rapidly approaching we will watch for discussions of contingency measures that can stall the impact of the cliff into next year. In reality a more measured solution looks destined to fall into January, leaving markets increasingly edgy about the impact on the economy – particularly as the debt ceiling limit will also be approaching fast at this point. Indeed, this impact is becoming more evident already. Declines in consumer confidence and the NFIB small business survey suggest increasing evidence of cliff uncertainty. Reflecting these worries we expect Empire State manufacturing survey remained in negative territory (-2) in December.
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