- UPDATE: BoE exceed market expectations – Rate cut accompanied by QE expansion and more
- UPDATE: 50% chance of UK recession – Pound reacts to NIESR forecast
- Pound advances on construction PMI – Markets relieved by smaller-than-forecast contraction
- Euro kept weak despite producer price growth – Rising prices suggest building inflationary pressures
- Fed’s Kaplan fails to ignite trader hopes – Claims a rate hike ‘on the table’ in September ignored
- GBP volatility ahead thanks to updated service, composite PMIs – Pound Euro, US Dollar exchange rates could fall
(12.45, 05/08/16) Ben Broadbent, Deputy Governor of the Bank of England, has told Reuters today that another interest rate cut could be on the cards. Yesterday’s meeting minutes had revealed that below-forecast levels of economic growth would prompt ‘a majority’ of policy members to vote for another interest rate cut. Broadbent has today confirmed that he is one of the members who favours a further cut if growth disappoints.
(08.45, 05/08/16) The Pound Euro (GBP EUR) exchange rate has opened at a three-and-a-half week low in the wake of the BoE’s stimulus decisions. However, poor German factory orders figures, which showed a -3.1% decline on the year in June, will weigh on the common currency and could pave the way for a Pound rally as markets close those short positions on GBP. The GBP USD exchange rate has not quite hit recent lows, although it is still trending around -11% lower than its pre-referendum high.
Previously…
Numerous headwinds faced the Euro (EUR) and US Dollar (USD) yesterday, allowing the Pound (GBP) to advance, despite weak domestic data.
The Pound rallied by around 0.8% against the Euro and edged higher against the US Dollar despite the widespread expectation that the Bank of England will look to cut interest rates at this week’s policy meeting. Other stimulus measures may also be unveiled as the BoE attempts to counter the headwinds introduced by Brexit.
Pound Collapses as Bank of England Expands QE, Announces Corporate Bond Buying, Cuts Rates
The Bank of England has just surprised markets with stronger policy easing than was expected, unleashing a package of stimulus measures to accompany a -0.25% rate cut. QE has been resumed and increased by £60 billion to £435 billion, with the Bank also intending to purchase £10 billion in corporate bonds. Additionally, £100 billion is being set aside to encourage banks to increase lending to consumers. GBP EUR and GBP USD exchange rates have tumbled as a result.
Economists Predicting UK Rate Cut; Markets Holding Record GBP Net Short Positions
Fewer than five of the analysts polled by Bloomberg expect the BoE to do anything other than cut interest rates, with nearly 50 other economists expecting an cut of varying magnitudes. Markets are also predicting a cut, with the net short positions held on GBP hitting a record low of -80%.
Pound Weakens as NIESR Warns 50% Chance of UK Recession
The National Institute for Economic and Social Research (NIESR) has warned that the UK has a 50% chance of falling into recession between now and the end of 2017. According to the group’s forecast, by late 2017 inflation will have risen above 3% and 370,000 jobs will have been lost. Over the next four years, NIESR claims, government borrowing will increase by £47 billion. The Pound has weakened against the Euro and the US Dollar, but losses are likely to remain contained until the markets have had a look at today’s revised July PMIs.
However, the fact that the finalised UK PMIs for July haven’t seen a revision in the services sector printing has cheered investors, even though the composite index was revised marginally lower after the flash estimate showed an initial severe drop. The Pound is currently strengthening verses the Euro and is fluctuating around opening levels against the US Dollar.
Moody’s, the credit ratings agency, has also issued a dovish Brexit prediction, claiming that the UK commercial property sector could see prices drop by as a much as -10% thanks to the UK’s decision to leave the European Union. According to the agency, London will be the most affected by the price drop as it is the home to the largest concentration of financial and professional service firms in the country.
(Last updated 16.53, 03/08/16)
Pound Trends Bullishly despite Weak Construction Sector
Markets appeared to be clinging on to whatever positivity they could find yesterday, causing the Pound to climb bullishly against the majority of its peers. UK construction data was bittersweet. The Markit PMI had already crashed to 46 in the run-up to the Brexit referendum, so markets were expecting a significant weakening on the previous result. The actual figure dipped just ten basis points to 45.9.
Markets reacted positively to this as it suggested that that the construction sector experienced the Brexit shock before the referendum vote, compared to other sectors which weren’t hit until afterwards. There is chance that the industry has already hit its Brexit-related low and will be able to rebound from current levels.
The score of 45.9 still revealed the worst pace of contraction in seven years, however. Markit’s Senior Economist Tim Moore noted;
‘July’s survey is the first construction PMI compiled entirely after the EU referendum result and the figures confirm a clear loss of momentum since the second quarter of 2016, led by a steep and accelerated decline in commercial building. Reduced volumes of new work to replace completed projects contributed to a fall in employment for the first time in just over three years.’
Producer Price Index Figures Fail to Boost Euro
Although producer prices rose at their fastest pace in nearly four years in June this did not boost the Euro yesterday. Month-on-month (MoM) producer prices saw an unexpected acceleration in growth, rising from 0.6% to 0.7% instead of dropping to 0.4%. Year-on-year prices remained in contraction, although the rate of decline slowed from a downwardly-revised -3.8% to -3.1%, which was better than the forecast -3.4%.
Rising producer prices suggests that inflationary pressures are building in the Eurozone; producers will pass rising costs on, driving up consumer prices. The European Central Bank (ECB) surely welcomed the figures, considering it is still struggling to drive inflation towards its target of around 2%.
Markets did not respond overly enthusiastically to the data, however. The Euro registered strong drops against the Pound (GBP) although it trended bullishly against the slumping US Dollar (USD).
US Dollar Falls as Kaplan Fails to Convince Markets of September Hike Viability
Comments from Dallas Fed President Robert Kaplan failed to inspire confidence in the US Dollar yesterday, which slumped virtually across the board. Kaplan attempted to suggest that there was still a chance of monetary policy tightening at the Federal Open Market Committee’s (FOMC) next meeting in September.
Speaking to Bloomberg in Beijing, where he was scheduled to give a lecture, Kaplan claimed;
‘September is very much on the table but I think we’ll have to see how events unfold and so it’s too soon to jump to a conclusion. We still believe the consumer will be strong in 2016, but it makes us also be very watchful for the next number of data releases to see what trend we’re on.’
However, as Kaplan will not be eligible to vote on monetary policy until 2017, the markets took little notice of his words.
Also weighing on the ‘Greenback’ was a mixed data docket. Personal spending and real personal spending held steady, against forecasts of a decline. Personal spending remained at 0.4%, rather than dipping to 0.3%, while real personal spending held at 0.3%, although the previous month’s growth was downwardly revised to 0.2%. Personal income, however, grew at a consistent 0.2% instead of accelerating as predicted to 0.3%. On a more positive note, the ISM New York index for July posted a strong rebound from last month’s score of 45.4, clocking in at 60.7 this time round.
GBP, EUR, USD Exchange Rate Forecast; Finalised Services and Composite PMIs could Weaken the Pound
After having crashed further-than-expected into contraction territory in flash estimates, markets will be hoping today’s finalised versions of the UK services and construction PMIs don’t weaken any further. With so many warning signs coming from the UK economy, investors may be relieved if the figures aren’t cut further; a similar reaction to yesterday’s construction PMI could be seen from the Pound.
The Eurozone is set to release retail sales figures for June. No growth is expected on the month, while annualised sales growth is predicted to accelerate from 1.6% to 1.8%. This would further improve the outlook for Eurozone inflation, boosting the Euro.
The US Dollar could face headwinds today if the ISM Non-Manufacturing Composite index for July weakens. The manufacturing variant has already dropped further-than-forecast, so a repeat performance by the composite would undermine already shaky confidence in the US economy.
GBP, EUR, USD Conversion Rates
The Pound Euro (GBP EUR) exchange rate was trending in the region of 1.1862, while the Pound US Dollar (GBP USD) exchange rate was trending in the region of 1.3315 towards the end of yesterday’s European session.