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#GBP steady against #EUR as UK #GDP on target at 0.7% – 1st September 2015

September 1, 2015
by Adam Cotton
In the West we are used to rumours. Rumours surrounding central banks monetary policy for example; will the Bank of England raise interest rates this year? Speculation about when the US Federal Reserve will raise rates. What I didn’t realise until this morning, is that such “rumours” are illegal in China with 197 people arrested for spreading them.
What there is no speculation about is how sensitive Chinese and US stock markets are to interest rates. Neither of them is keen to pull the rug from under what are, by many accounts, overvalued equity prices in case their resultant decline dampens the economy. For the Peoples Bank of China that means further drops in interest rates and for the Federal Reserve it means more hesitation about raising interest rates.

Comments by the Federal Reserve’s vice chairman in an interview on Friday implied that there is still the possibility of an increase on the 17th September. Despite the comments, it didn’t do much for the US Dollar which is unchanged against the Euro from Friday’s opening level.

The biggest casualty of speculation that interest rates won’t be going up as soon as once thought is Sterling. In the last week it has lost ground to all except the Euro and the Swiss Franc. Although the governor of the Bank of England said on Saturday that “developments in China are unlikely to change the process of rate increases” investors don’t seem convinced. The first revision to Britain’s second quarter growth did not do anything for Sterling either with the quarterly expansion of 0.7% in line with expectations.

The main loser over the weekend was the NZ Dollar. It was not particularly hurt by weaker purchasing managers’ index readings from China this morning but did take a hit from yesterday’s news of a six-year low in business confidence. Australia’s Dollar was unmoved by the Reserve Bank of Australia’s decision to keep its benchmark interest rate unchanged at 2%.

Today brings the global round of manufacturing sector PMIs and employment data from Germany, Italy, Euroland and South Africa. Canada reports on Q2 gross domestic product, which is forecast to have contracted for a second quarter.

Perhaps the most interesting development to come out of last week’s ferment was investors’ new attitude to the euro. With the cancellation of Grexit it has become a safe-haven currency, shadowing the Yen.