Productivity is the key to UK growth

The National Institute of Economic and Social Research (NIESR) has claimed that business investment and spending by consumers will fuel healthy economic growth here in the UK, but only if productivity growth returns. They stated that the economy should grow by 2.5% this year (unchanged from its May estimate) and that unemployment would drop to its longstanding level of between 5 and 5.5%. The NIESR said that a key determinant of their forecast is the return of meaningful productivity growth – a measure of increase in output per worker. This alone constitutes the largest domestic risk to the UK’s economy. The think‐tank also stated that the economy would expand by just 0.4% in the three months to September, halving the forecast of 0.8% growth they made in May. The report was largely upbeat and the pound moved positively versus both the dollar and the euro in trading yesterday. GBP/EUR has pushed back above 1.4300 interbank (IB) again, but GBP/USD has rebounded overnight after a Federal Reserve member gave support to the dollar.

There are no significant data releases from the UK today, so all eyes will be on tomorrow’s highly anticipated Bank of England interest rate decision to see if there will be a split in the vote.

The euro had another lacklustre day with very little overall movement across the day. Tuesday morning released positive news for the notoriously high Spanish unemployment results, reporting an improvement of 74,000 jobs, which was almost 30,000 better than expected. However, this result was counteracted later in the day with the eurozone reporting deflation at ‐0.1%. Until inflation levels in the euro block picks up and returns, in the medium term, to the target of 2%, investors will remain worried about the future of the economic climate.

The Greek bailout negotiations ran into a stumbling block last night as the European creditors and the Greek government were deciding which businesses should be privatised. The Greek finance minister, however, was quick to assure the markets he did not think it was an obstacle that would cause any problems and that they are still set to approve the finalised agreements before the deadline of 20 August 2015.

Announcements for European financial service PMI data is released this morning. They are all forecast to release similar to last month’s readings; if this does not occur, we can expect to see some euro volatility.

The dollar remained broadly unaltered yesterday following the release of June’s factory orders data, which came out in line with expectations at 1.8%. EUR/USD rose very slightly towards the 1.0980 (IB) level, but was unable to gather momentum and remained confined to its daily range, finishing the session unchanged. Similarly, GBP/USD ended the London trading session just 0.15% higher, managing to close above 1.5600 (IB) for the first time this week having tested the level yesterday.

Just as the day seemed to be drawing to a close, Atlanta's Fed President, Dennis Lockhart, shocked the market by publicly announcing his view that the Federal Reserve should raise interest rates in September. He went on to say that it would take a 'significant deterioration' in data to stop them moving forward, a sign that Fed officials are seriously considering a hike next month.

GBP/USD subsequently dropped back to support levels around 1.5560 (IB), whilst EUR/USD traded below 1.09 (IB). There is very little out in terms of fundamental data today, however, it will be interesting to see whether the market continues to price in a September rate hike following these most recent hawkish comments.