Only a few months ago we were looking at the possibility of a triple dip recession for the sterling economy, but things have changed dramatically since then, and this is the first time since 2006, that we are looking of a possibility of four quarters of positive growth for the UK economy. Investors have certainly welcomed this positive change, which took place due to strong macroeconomic policies introduced by the Bank of England, over this course.
If we look closely, we will see that the major driver for this growth was in the services sector, and this week’s PMI data does provide an evidence to support this argument. The reading of 60 which was posted this week was the best reading since the officials started to record this data. Even the manufacturing PMI data also suggested that the job growth output is at its highest level since 2011, and the export for the country has also increased at its fastest pace in nearly 19 years. The downside was the increase in the prices, which could certainly feed as an increase in the inflationary pressure for the country.
The Bank of England’s chancellor does have one major problem on his hand, which is the average income is still under the rate of inflation, and due to this reason many people do not believe that there has been any strength in this recovery. We think that this will be the key area in his speech that he will try to address, and there is a possibility that some measures could be announced aiming at lowering energy bills. Other measures which could be on the cards are lowering the business rates, personal allowances.
However one thing is certain, that there is a high probability that the Bank of England may not making any changes to its interest rate, and gilt yields. And if the economic data continued at this pace, there is a possibility that the government threshold level of unemployment could be reached by mid next year.
As for the ECB meeting, we do know Mario Draghi did surprise the markets by lowering the interest rate by 25 basis points, but if one is thinking, that a similar event will take place again, then we should certainly look at the EUR/USD pair which paired its losses quickly, as traders came to their conclusion that this cannot be repeated again this year. I would agree that the ECB may not be changing its monetary policy for this year and they could leave the interest rate unchanged with 90% probability.
But, if you think that the ECB is done with their easing policies, then the answer is no, because inflation is extremely low and economic data is also not supporting this evidence. So I will say that Draghi’s tone could be dovish as the consumer spending and service sector is still declining in the euro region. The only recovery which we have seen so far, is in Germany, but the ECB is focused on broad base recovery, which we are not seeing therefore, the ECB does have an argument to keep their loose monetary policy going.
What I believe is that Mario Draghi would carry on with his statement which is that the negative rates are possible, but there is no need for it, and this could support the euro, but if he says anything more dovish, as compared to November, it could push the euro lower.