Subdued market reaction to China GDP
After weeks of intense speculation, the markets commenced the trading week with confirmation that China GDP growth had slipped below the government target of 7%. The economy expanded at 6.9% over the previous quarter and while this is not horrendously below target, this is the first time since 2009 that economic growth has printed below 7% and reinforces continual concerns about slowing growth throughout the global economy.
Suspicions are high that the China economy will suffer from further declining economic momentum next year and I continue to expect the People’s Bank of China (PBoC) to defend government targets and prevent growth from slipping even lower. While we are regularly waking up to ongoing concerns over the health of the China economy, this will not be a huge concern domestically until it begins to negatively i mpact local employment prospects. I continue to repeat that it will always be those economies that are heavily reliant on trade with China that will have to cushion slowing growth in the economic powerhouse, mainly because they will also have to suffer from the fallout from a decline in China demand for its products.
Although impact on the GDP data from China had the currency markets, traders a subdued should not underestimate that this is an enormous piece of data for the Federal Reserve when it comes to raising U.S. interest rates in 2015. Bearing in mind that the U.S. central bank citied global economic weakness as a primary reason to delay raising interest rates, further signs of growth slowing in an economic powerhouse, alongside the reoccurring concerns over the pace of growth in both Europe and Japan should further suspicions that the Fed will not be raising interest rates this year.
After jumping around $90 since the beginning of the month to trade at a near four-month high above $1190, Gold has slipped to trade towards $1170 as traders take profit on the metal. Although Gold has made strong gains throughout October, I still think that the metal has potential to continue trading higher before the end of the year. US interest rate expectations for 2015 are not only diminishing as each trading week passes, but also being pushed further back into 2016 with this providing encouragement for investors in Gold.
Not only has the pushed-back US interest rate expectation provided positive momentum for Gold, but also increased safe-haven appeal as a result from confusion on central bank intentions.
The markets are lacking clarity on central bank intentions from the US, as well as the ECB and possibly the Bank of Japan (BoJ) on whether both could ease monetary policy further. The threat of central banks acting to reinvigorate growth might result in a lack of trust from traders to invest in currencies and encourage demand for
alternatives and safe-haven assets such as Gold.
The GBPUSD is currently teasing the prospect of moving past 1.55, which is seen as significant resistance, having had limited gains in the pair for nearly a month. This move is threatening to happen as three members of the Bank of England (BoE), including Governor Mark Carney, are set to testify at the treasury committee. For the GBPUSD to finally advance to 1.55 and to tease a larger gain for the GBP, optimistic comments around the possibility of future UK interest rate rises will be required.
It is clear from several BoE members that the central bank would prefer to begin normalising monetary policy, but persistent weakness in inflation has repeatedly pushed back UK interest rate expectations over the past year. We are now seeing significant improvements in UK wage growth, which should filter through other areas of the UK economy and improve inflation prospects as we enter the beginning of 2016.
With that being said and despite the BoE clearly being keen to start raising UK interest rates, I can’t see a rate rise until June 2016.
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