UBS Morning audio comment: Growth and tightness
Per the full note , the UK economy is showing signs of resilience, with GDP growth driven primarily by the services sector. Conversely, the US labor market remains less tight than anticipated, which alleviates concerns over a potential wage-price spiral despite ongoing inflation pressures. This dual environment of UK growth and US labor market slack suggests a divergence in monetary policy trajectories, influencing FX dynamics particularly in GBP/USD pairs. Upcoming US labor data and Federal Reserve communications could become critical indicators for market positioning in the near-term.
What the desk is arguing
The desk believes that the UK economy's continued growth could strengthen the GBP, while the US labor market's current state supports a weaker USD stance. Per the full note , UK GDP has shown recent strength, particularly in the third quarter, largely driven by services; US initial jobless claims, however, are not indicating significant labor market tightness.
This divergence could influence the direction of monetary policy from both the Bank of England and the Federal Reserve, with UK consumers enjoying positive real income growth that prompts consumption. As noted, significant factors like the upcoming US jobless claims report may further inform traders about potential Federal Reserve shifts.
Where it sits in our coverage
Our current consensus target for GBP/USD is 1.075, with a range from 1.04 to 1.12. - jpmorgan projects a target of 1.10. - bofa has a contrasting view, aiming for 1.04.
The desk's thesis aligns closely with jpmorgan, who advocates for a stronger GBP driven by positive economic data, while bofa presents a cautionary view that may limit any rapid GBP appreciation.
How other firms see it
Group-aligned firms such as jpmorgan are leaning towards a bullish GBP narrative, primarily influenced by domestic economic strength. In contrast, bofa takes a more bearish stance, cautioning against overestimating the UK's growth potential amidst global uncertainties.
Key related areas to monitor include GBP/USD exchange rate fluctuations and the implications of upcoming US labor reports for Federal Reserve monetary policy. The ongoing dynamics in the UK economy could serve as a counterbalance to the more stagnant labor conditions in the US, impacting both currencies significantly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01UK economy shows positive growth with strong services sector.
- 02US labor market lacks tightness, reducing wage inflation worries.
- 03Divergence in economic conditions influences monetary policy outlooks.
- 04Key focus on upcoming US labor data and Fed communications.
Market implications
Watch for the GBP to potentially strengthen if upcoming UK economic data continues to support growth prospects. Likewise, keep an eye on US employment figures and Federal Reserve statements, which could shape expectations for the USD in the near term.
Risks to this view
A sudden tightening in the US labor market could prompt a shift in Federal Reserve policy, leading to an unexpected USD appreciation. Additionally, any signs of UK economic slowdown or reversal in consumer sentiment could undermine the GBP's strength, creating volatility.
The UK economy continued to demonstrate growth. The US labor market continues not to show much tightness. View this email in a web browser Growth and tightness UBS morning audio comment by Paul Donovan UK GDP continued its recent strength, with further gains in the third quarter. (The numbers are just a rough approximation, of course).
Services led growth, with car and chemical imports the main offset. UK consumers have generally experienced a small positive real income growth, but have room to reduce savings rates and continue consuming. US initial jobless claims data may get some attention in an otherwise relatively quiet data calendar.
US policy-makers would have to be concerned if there were evidence of a really tight labor market, creating a wage-price spiral. However, in spite of repeated inflation shocks, that has not emerged. Housing data is also due.
There are several Federal Reserve speakers scheduled, at a time when there is heightened interest in the direction of US monetary policy. The tone of recent remarks has covered a fairly broad spectrum of possibilities. ECB President Lagarde will also be offering comments in Paris, but these are less likely to interest markets (already looking toward Lagarde’s potential successors).
There is more noise around the Gulf war, with Iran reiterating that it (and Oman) will exert control over the Strait of Hormuz. Markets are not surprised by that, and for now there is enough to keep the optimism bias still intact. Read important disclaimer 〉 Listen to today's Thursday, 12 November update Listen now 〉 Recommended content Listen to past recordings in Paul Donovan's daily updates 〉 Nobel Perspectives - Exploring the questions that shape our world 〉 You have received this email because you registered at .
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