Data from the Bank of England yesterday showed UK mortgage approvals fell by more than expected to their lowest level since November 2014. Yesterday morning, data from Nationwide showed UK house prices rose in September by 0.3 per cent, down from 0.6 per cent a month earlier. Taken together, the data suggests the BOE will continue to keep open the possibility for another interest rate cut which is negative for the GBP outlook.
On a more positive note, yesterday a final revision to UK Q2 GDP rose from 0.6 per cent to 0.7per cent, with Standard & Poor’s this week saying the UK will probably now avoid a recession in coming quarters. UK current account data for Q2 also beat expectations. The data covers Britain’s trading position with the rest of the world but yesterday’s report does not cover much of the post-Brexit environment.
Euro
The pound has not risen much above €1.15 against the euro despite fears about DB – Europe’s biggest investment bank. The rationale here is that the more European banking shares suffer, the more unwinding of carry trades will lead traders back into the euro.
The euro has started to behave like the yen in 2016 where risk averse sentiment actually supports the euro. Over the past 12 months, each time Chinese economic risks have flared, the euro has tended to appreciate against both the pound and US dollar. The safe haven Swiss franc is strengthening though, moving towards a multi-month high against the euro, with GBP/CHF also falling back towards multi-year lows.
Although the DB story does have many scenarios to consider, the IMF in June warned that DB may be the biggest contributor to risk among “systemically important” global banks. If new signals suggest this DB crisis can become a systemic issue, meaning the entire European banking sector is at risk, then the euro may start to weaken.
Dollar
US economic data from Thursday went largely unnoticed as markets focus on the bigger global story of Deutsche Bank. However, the data did show better US economic growth.
Thursday’s GDP revisions showed the US economy actually expanded by 1.4 per cent, up from the disappointing 1.1 per cent second estimate. It’s important to note that business investment is falling ahead of the US election in November. The prospect of a Donald Trump presidency makes this election a global event risk.
Next week, on October 7, the next US non-farm payrolls jobs data will be released. The US dollar on a trade-weighted basis is trading at over one-week highs amid worries about Europe’s Deutsche Bank.