Bank banks on Boris Brexit
GBP PMI manufacturing produced the worst figures since early 2013 with 48.0 in July but was actually above the forecast. Production declined at the fastest pace since 2012 and orders dropped further. The uncertainty continues to sap confidence as does the re-routing of supply chains away from the UK.
The Bank of England held interest rates at 0.75% as widely expected. The central bank maintained that a smooth Brexit would likely require gradual interest rate increases, although some recovery in global growth would also be needed while the impact of Brexit uncertainty had become more entrenched. The Bank downgraded near-term GDP growth forecasts while inflation forecasts were slightly higher. Sterling rose from below 1.2100 on the Dollar but the gains evaporated when Moody’s Rating Agency warned that increased government spending could increase credit-rating vulnerability. The Euro strengthened to near 1.0930 after the government lost the Brecon by-election, which reinforced political uncertainty by reducing the government’s majority to just one.
In a well-telegraphed move, the Federal Reserve (Fed) delivered its first rate cut since 2008. The FOMC, after reviewing diverse scenarios, believed a rate cut of ¼ basis point was a necessary adjustment to maintain the economy on a sustainable growth path. The Fed statement was a near-perfect copy and paste job from the last time, which left many in the market confused about the decision.
Fed Chief Powell also sent out mixed signals expecting the latest action to be neither a one-off nor “the beginning of a long series of rate cuts”. At best, the central bank remains data-dependent with more weights placed on growing external uncertainties triggered by trade tensions.
Market volatility spiked after the European close following President Trump’s announcement that he would impose a 10% tariff on all remaining Chinese exports from September 1st. As the dollar lost ground, the Euro recovered to the 1.1090 area and the dollar remained weaker as trade fears overshadowed key employment data due later today.
The Euro is currently trading in and around 1.1085 against the Dollar. The pair faced some selling pressure just below 1.11, due to a risk off tone in the global markets. This tone will likely overshadow Eurozone’s Producer Price Index and Retail Sales data scheduled for release this morning.
Later in the data, the focus shifts from trade tensions to the US Non-Farm Payroll report with data expected to show the US economy added 164K jobs in July, having previously added 224K jobs in June. A reading coming in better than expected will likely sink the EUR/USD to 1.10 or below.
Data to watch:
9.30am GBP Markit Construction PMI (Jul)
10am EUR PPI
10am EUR Retail Sales (YoY) (Jun)
1.30pm USD Nonfarm payrolls, Average Hourly Earnings, Unemployment Rate, Trade Balance
3pm USD Factory Orders, Michigan Consumer Sentiment Index