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EUR/GBP Hits a Two-Month Low, UK GDP Picks Up in Q4

EUR/GBP Hits a Two-Month Low, UK GDP Picks Up in Q4

Nick Cawley, Strategist

Talking Points

- EURGBP hit a two-month low as Bund yields fall in record low territory and UK 4Q GDP hits 0.7% q/q

- GDP data show a UK slowdown may be on the horizon.

- See the DailyFX Economic Calendar and see what live coverage for key event risk impacting FX markets is scheduled for next week on the DailyFX Webinar Calendar.

Recently released UK 4Q GDP data beats on the upside but numbers show that the UK economy may be slowing down as Brexit looms on the horizon. EURGBP fell pre-release and remains weak as short-dated German bond yields hit a record low, further widening the US/German yield spread.

UK GDP growth in the fourth quarter of 2016 was revised up to 0.7% quarter-on-quarter, from 0.6% quarter-on-quarter, however on a calendar basis, growth slowed down to 1.8% from 2.0%, suggesting a weaker start for 2017.

Commenting on today’s GDP figures, ONS Head of GDP Darren Morgan said, “The economy grew slightly more in the last three months of 2016 than previously thought, mainly due to a stronger performance from manufacturing.”

Morgan added thatoverall, the dominant services sector continued to grow steadily, due in part to continued growth in consumer spending, “although retail showed some signs of weakness in the last couple of months of 2016, which has continued into January 2017.”

EURGBP fell pre-release and garnered a small bounce back after the figures, but the pair remain weak and trade at their lowest level since late December 2016. The latest downturn was prompted by short-dated German bond yields falling into record negative territory. The 2-year German Schatz was quoted Wednesday with a -0.91% yield, widening the US/German yield differential to 2.12%. Analysts put the latest move down to a supply/demand imbalance in the short-end of the curve, ongoing ECB demand for paper and a flight to safety as European political concerns grow.

Chart EURGBP 30-Minute Timeframe (Wednesday February 22, 2017)

Chart by IG

--- Written by Nick Cawley, Analyst

To contact Nick, email him at Nicholas.cawley@ig.com

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