Market Analysis

FED and BoE turn more hawkish

 

Last week started under the spell of risk aversion, as a mix of anxiety over what the fed had in store and also concerns linked to the potential collapse of Chinese construction giant Evergrande, spoked the markets. However, this sentiment didn’t last for long and the markets recovered most of the losses. This is the ActivTrades weekly Outlook, where every Monday we analyse the economic calendar and identify key events, focusing on how they may impact the markets. This week we will preview UK GDP, Eurozone inflation and US manufacturing.

 

On Thursday the office of national statistics in the UK will release the country’s GDP data for the second quarter of the year. Last time around, which is to say, in the first quarter of the year the British economy had grown 4.8% comparatively to the previous quarter. This big leap was to be expected given the end of lockdowns and the return to a normal level of economic activity. However, analysts predict that this time around the British GDP in Q2 will actually be smaller than in the previous quarter, shrinking 1.5%. Normally such number, if confirmed, would be likely to have a detrimental impact on the pound… Still, that may end up not being the case. Last week the bank of England surprised some observers, by adopting an hawkish stance and mentioning rising inflation while alluding to the possibility of reducing QE and hiking rates. This was a surprise and the markets responded by giving the pound a boost on Thursday. So, lets wait for Thursday to see how GDP lines up and how it will impact the markets.

Also on Thursday the Eurostat will release preliminary inflation numbers for the month of September in the Eurozone. Inflation has been at the centre of the narrative in Europe, especially after the August reading which was the highest I can remember, reaching 3%. The expectation points at the continuation of the trend, as the European economy roars back to life. This vitality has been welcomed and resulted in the upgrade of the growth forecasts for 2021 and 2022. The reverse side of this coin is that Inflation is likely to remain well above the 2% target.

Still, even if Inflation ends up reaching 4% or more in September, it is unlikely that the ECB will be moved to alter its policies. As Christine Lagarde jokingly said recently: “The lady isn’t tapering”. So, even if there is a high reading, the euro is likely to remain close to the current levels between, trading $1.16 and $1.18.

We’ll end our weekly preview by zooming in on the release of the American manufacturing purchasing managers Index, also known as PMI. This data provides a snapshot of the state of the US manufacturing sector, with a reading above 50 suggesting an expansion of activity during the surveyed period. The consensus for the month of September points at a number close to 60, which, as mentioned, paints a positive picture. Such outcome is likely to increase the confidence of the financial markets in the American economy and therefore offer support the US dollar.

The greenback ended last week on the front foot, mainly because the Fed’s FOMC meeting confirmed that the Central bank is maintaining an hawkish stance, hinting that the beginning of tapering could take place before the end of the year. So, a positive PMI will reinforce this narrative and could offer further support to the American currency.

 

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