UK and Eurozone Data Give Reason For Optimism

UK Consumer Continues to Drive the Recovery in Q3

While the UK has been seeking a more balanced economy with less reliance on the consumer and the services sector as a whole, this was once again the main driver of growth, with rising wages, low interest rates and low energy prices supporting more spending. Weaker exports as a result of the stronger pound continue to hit the manufacturing sector and weigh on output but fortunately, the inability of the government to achieve more balance in the economy means the negative impact of this is somewhat limited.

Going forward the UK will continue to face a number of challenges as the government seeks to eliminate the deficit, which means more fiscal tightening, while the uncertainty surrounding the EU referendum could weigh on investment and hiring. The economy should still grow at a good rate throughout this though, as wages continue to grow and energy prices remain subdued, offering ongoing support to the consumer. A report released this morning that showed the UK consumer is expected to spend more on presents than any other country in the survey, including the US. This again supports the view that a strong UK consumer will continue to support the economic recovery.


Despite an initial push higher following the GDP release, the pound has continued to fall against the dollar this morning and is now trading back near the seven month lows hit earlier in November. This pair became much more bearish when Bank of England Governor Mark Carney changed the outlook for the first interest rate hike from the turn of the year to 12 months away and I don’t think the markets have yet fully priced this in. The next support for the pair could come around 1.50, a key psychological level that was an important resistance level for the pair back in March and April. Beyond here, the pair could find further support around 1.4850, although based on how tame the sell-off has been since Carney’s comments, I don’t expect this to be a fast move.


Eurozone Sentiment Readings Encouraging But Should Be Treated With Caution

The eurozone sentiment indicators were broadly better than expected this morning, with overall economic sentiment among these but unchanged from October following its upward revision. While these numbers are encouraging and point to a slight pickup in what is currently a sluggish recovery, we should treat the data with some caution. The surveys were conducted prior to the terror attacks in Paris which could have an impact in the coming months have an impact on the services sector. Given that services have been the bright spot in recent surveys, with manufacturing suffering as a result of the emerging market slowdown, it is possible that optimism could cool again next month, although I do think this would only be a temporary effect.


We’re seeing a similar theme of dollar strength driving this pair this morning and while the data may have brought some temporary reprieve, I think further losses could follow. The pair is trading back near seven month lows this morning and could grind back towards 1.05 ahead of next Thursday’s ECB meeting. I am treating these moves with caution though as each time we have a leg lower, the MACD records lower momentum in the move which can be a sign that the pair is bottoming out, at least in the short term. That said, ECB President Mario Draghi does have a tendency to over deliver when the central bank does finally act and it may be this that is behind the continual grinding lower in the pair, even if momentum is waning. If Draghi does over deliver again next week, I’m sure momentum will pick up again and once again we’ll be eyeing parity by the end of the year.


The S&P is expected to open 5 points higher, the Dow 21 points higher and the Nasdaq 23 points higher.

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Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

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