Sterling hit after a negative outlook from credit ratings agency Moodys

09.00 AM

GBP

There was no data of any economic relevance yesterday from the UK, but ratings agency, Moodys, cut growth forecasts on the back of the dismal GDP numbers last week, helping to hamper the pound’s recent run of good form seeing it lose close to 1% against most other major currencies.

In the ratings agency’s latest credit report, Moodys lowered the 2012 growth forecast to 0.4% and cut the 2013 outlook to 1.8%. However, after this the UK is expected to return to growth of about 2.5%. 

Last week, a preliminary estimate published by the ONS (Office of National Statistics) said that the UK economy shrank by 0.7%, far worse than previous estimates and showed a third consecutive quarter of contraction. Moody’s did however go on to say that due to the jubilee celebrations and the washout of an early summer, the forecast may be updated in line with the post preliminary data over the next month.

Boosting Sterling’s value as well, the agency also reaffirmed the UK’s AAA credit rating, yet maintained a negative outlook in line with their growth forecast. 

This morning we have had more bad news on the state of the UK economy from Nationwide. The UKs largest housing company said that prices fell in July by 0.7% in line with GDP, meaning that overall house prices are 2.6% lower than this time last year.

Today’s UK economic data releases:

07:00 Nationwide House Prices for July 

09:30 Purchasing Managing Index for Manufacturing (A monthly gauge of manufacturing activity)

EUR

Only retail sales data from Germany was scheduled for release yesterday, so you would have been forgiven by thinking the session may have been a quiet one. Angela Merkel’s government saw to it that this would not be the case.

Year-on-year German retail sales printed at 2.9%, far better than expectations of 0.4% growth. Retail sales numbers measure changes in sales of the German retail sector. Given that consumption makes up a significant portion of the German economy, the retail sales figure acts as an indicator of domestic demand. For the month of July though, the figure declined by 0.1% versus expectations of 0.5% growth, so the uptick was seen as temporary, and failed to prop up the euro.

The euro gained major ground last week when comments from ECB official Nowotny stated that the ESM (a permanent bailout fund in place for the euro zone members) should be granted a banking licence. His comments alone boosted the euro massively, but it was also helped by ECB President Draghi who said the struggling currency would be supported at any cost. 

Yesterday, the financial juggernaut that is Germany showed its power by rejecting allowing the ESM’s banking licence, on the grounds that the rules of the ESM do not foresee a licence to allow refinancing at the ECB, but France and Italy are now beginning building support for the plan to allow the permanent backstop to gain unlimited firepower courtesy of the ECB, according to Germany’s Sueddeutsche  Zeitung newspaper. 

Today’s EU economic data releases:

08:45, 08:50, 08:55; Purchasing Managing Index for Manufacturing from Italy, France, and Germany respectively.

USD

Yesterday was positive for the state of the US economy, judging by the several reports released, meaning less chance of more monetary stimulus from the US Federal Reserve this evening and more chance of dollar strength.

Most notably was the release of the measure of consumer confidence from the world’s largest economy. The report showed confidence from consumers unexpectedly rose for the first time in five months as Americans became more upbeat about job prospects later this year, according to another report. The Conference Board's index increased to 65.9 this month from 62.7 in June, so much better than the 61.5 which economists had predicted. 

Other positive US data yesterday came in the form of PMI numbers for July, normally used as a yard stick for nationwide manufacturing conditions, which printed at 53.7. Comfortably up from June's 52.9.

All this positive data not only helps Obama’s re-election campaign, but decreases the likelihood that the FED will divert from its current path of monetary stimulus in the form of Quantitative Easing (QE3). Most analysts now believe that if more QE is announced, it will not be this side of September’s equivalent meeting.

Today's US economic data releases:

12:00 MBA Mortgage Applications

13:15 ADP Employment Change for July

15:00 ISM Manufacturing for July

19:15 Federal Open Market Committee Rate & Asset Purchasing Decisions