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February 7, 2017 By: , No Comments

Banking Sector ‘Adequately Capitalized’ in the UK

When US NFP data was released on Friday, 3 February 2017, January totals amounted to 227,000 new jobs. This was well above consensus forecasts of 180,000 new jobs. However, the problem was not nonfarm payrolls growth – which happened to be the sharpest increase in 4 months – it was real wage growth. That real wages increased by just 2.5% in January, was a disappointment for dollar bulls. The GBP/USD pair traded lower at 1.25, and is currently trading at 1.2458 against the greenback, down 0.23% or $0.0028. This week, only a limited number of important economic data releases are scheduled. With regards to the Eurozone and the United Kingdom, there is growing concern about Greece and its impact on the EUR. With rising bond yields in Greece, analysts are increasingly concerned that financial stress is on the way.

 

The International Monetary Fund (IMF) believes Greek debt levels are out of control. Additionally, the German Finance Minister, Mr. Schauble commented that the IMF could cripple the Greek economy if it cancelled the bailout. This has the capacity to adversely affect the EUR and the UK economy too. One of the clearest indications of rising risk is the increasing gold price. Every time geopolitical uncertainty increases, gold tends to rally. The latest gold price is $1,230.09 per ounce, up 0.95% or $11.59. Gold has rallied 3.98% over the past 30 days, or $46.60. HSBC helped UK equities markets recently by chiming in that the banking sector was ‘adequately capitalized’. The multinational bank also upgraded Lloyds to a buy and raised guidance on RBS and Barclays.

 

Economic Growth Slows in the United Kingdom

UK economic data drove the GBP lower against a basket of currencies as weaker Services PMI and the BOE Inflation Report were released. The latest economic indicators for the UK reflect the following:

  • GDP growth rate of 0.60
  • Unemployment rate of 4.80
  • Inflation rate of 1.60
  • Interest rate of 0.25%
  • Debt/GDP ratio of 89.20

 

The FTSE 100 index is currently at 7,172.15 and the yield on 10-year government bonds is 1.32%. Services PMI came in 54.20, down from December’s reading of over 56. Analysts are anticipating that the Services PMI data will drop to 52.90 in 12 months. The BOE (Bank of England) inflation report painted a disturbing picture. The report was released on Thursday 2 February 2017 and it clearly shows that inflation is rising in the UK. This will likely continue through 2017. The report released by the BOE six months ago was hardly as optimistic. The BOE is expecting economic growth in the region of 2% in 2017. The plunge in the value of the GBP has contributed to rising inflation.

 

Central banks typically respond to rising inflation levels by raising the interest rate.  The question that traders are asking now is whether BOE Governor Mark Carney will follow suit and raise rates like Janet Yellen at the Fed. The UK economic model does not follow the US model. In the US, fiscal spending and strong economic growth are driving inflation higher. In the UK, the Brexit saga is having a negative effect on the GBP, imports and exports. Excess demand is not causing inflation in the UK, rather it’s the depreciation of the GBP. If Carney attempts to cut rates further, it will simply contribute to increased money supply and higher inflation. If he raises rates, an economic contraction will ensue.

 

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Brett Chatz

About Brett Chatz

Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.

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