Spending on the rise

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialists. Tuesday 16th June 2015 17:11 EDT

British consumers finally look ready to spend like they used to, as lower prices for basics give them more money to eat out and travel, bolstering the economy against weak demand from abroad. Last month the Bank of England forecast that spending would rise by 2.75 percent in real terms this year, the fastest rate in a decade. Consumers account for almost two thirds of British spending, more than in any other big advanced economy apart from the United States.

Sterling strengthened on the back of strong industrial output data boosted by a surge in oil and gas production. Industrial output rose by 0.4 on the month, above economists forecast for a 0.1% increase. The increase will raise hopes that Britain's economy picked up speed in the second quarter. Manufacturing output did actually fall, largely due to weak economic growth in the UK’s major export markets and weak investment in the oil and gas industry on the back of lower energy prices.

Sterling further strengthened after an estimate from the National Institute for Economic and Social Research said Britain's economic growth picked up pace in the three months to May, recovering from a weak first quarter. They estimate that gross domestic product in the three months to May was 0.6 percent higher than in the previous three-month period, the fastest growth rate since January and up from a 0.5 percent rate in the three months to April.

Talks between Greece and the Eurogroup remain an uncertainty with regards to the final outcome. Greek PM Tsipras said the country will not agree a third bailout program nor accept an agreement without the restructuring of their debt. Tsipras stated there is no deadline in regards to ongoing negotiations and that talks with creditors have entered the final stage. However conflicting comments from the European Commission President Juncker suggested he is losing patience with Greece and is yet to receive a list of reforms from the troubled nation that could resolve the ongoing stalemate. A comment from Greek Finance minister Varoufakis said that discussions with German Finance Minister Schaeuble had been productive.

The European Central Bank and the International Monetary Fund want further economic reforms before they release the €7.2bn (£5.3bn) of bailout funds. It’s believed Greece is willing to increase VAT, but reduce rates for food and medicine and a further reduced rate for books and hotel accommodation.

There were reports of a German proposal to allow Greece to receive a drip-feed of loans in return for a staggered reform programme. According to the reports, the chancellor Angela Merkel is prepared to accept a much-reduced reform programme, slimmed down to just one or two areas as part of an initial package to salvage a deal with Greece and prevent it exiting the eurozone. The softening of the German stance towards Athens cheered investors keen to see a sustainable rescue of the debt-stricken country after more than four months of negotiating. If Greece do not receive fresh funds to enable it to make a 1.6BEUR payment to the IMF by the end of June, Greece are likely to default.

Fed member Dudley openly stated that a rate hike is expected to occur this year and that the difference between market expectations and timing of rate lift-off is extremely close, which was taken as a surprise given Dudley’s usual dovish stance. There were reports that Obama announced that the USD is too strong and could potentially damage exports; however a comment from a US official was also backed up by Obama who stated at the G7 meeting that the USD strength is not a cause for concern. Obama also pointed out at the G7 meeting after speaking with Angela Merkel, that sanctions on Russia must stay in place until it implements a deal to end fighting in the Ukraine.

Consumer confidence rose more than forecast in June as Americans were the most upbeat about their wage prospects in seven years. Preliminary consumer sentiment index increased to 94.6, topping all estimates Consistent labour-market improvement has helped buoy consumers’ attitudes even as costs at the gas pump rise from the cheapest rates since 2009. Further job gains and bigger paychecks should brighten moods and help underpin the household spending that makes up the largest part of the economy. Americans expected an inflation rate of 2.7 percent in the next year, down from 2.8 percent in May. Over the next five to 10 years, they also projected a 2.7 percent rate of inflation, compared with 2.8 percent in the previous month. Measures of sentiment have been uneven as Americans adjust their outlook after the first-quarter growth slump. The Conference Board’s consumer confidence index rose in May to 95.4 from 94.3 the prior month that were the weakest since December. More Americans viewed current economic conditions as favourable, according to the New York-based private research group’s data.

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