It’s not Balderdash; It’s Boris
The Bank of England’s Michael Saunders stated that the pace of underlying growth of the UK economy is weak and Brexit may prevent interest rates from rising and that no-deal would trigger another Sterling fall. His change in stance on interest rates reinforced negative sentiment. CBI industrial orders unexpectedly declined, sharply, to -34 for July, from -15 in June, the sharpest decline for three years which reinforces concerns over the UK economic outlook. BoE Chief Economist Andy Haldane was more optimistic than his colleague, stating he would be cautious about any monetary easing barring a sharp economic downturn, although he also suggested rate cuts were off the agenda.
As widely predicted, Boris Johnson won the Conservative Party leadership election, although the margin of victory was only 2:1 whereas 4:1 has been expected. Markets remain concerned over another weak UK government given the opposition to a ‘no-deal’ scenario. Sterling dropped below 1.2420 on the Dollar before a slight rally and the Euro was held above 1.1111 before falling back to near to around 1.1160. Today’s Sterling driver will be the perception of authority of the new government and it’s ability to deliver.
The dollar was resilient despite weaker than expected releases with commodity currencies unable to make significant headway. The Dollar against the Euro dipped to 7-week lows just under 1.1150 and 1.2440 against Sterling.
The US Philadelphia Federal Reserve (Fed) non-manufacturing index strengthened to 21.4 for July from 8.2 previously. The components were generally strong despite a slight slowdown in increases for wages and benefits. The data maintained the run of more favourable US business surveys and continued to dampen expectations of aggressive Federal Reserve interest rate cuts. Existing home sales, however, declined to an annual rate of 5.27mn from 5.36mn. The Richmond Fed manufacturing index dipped sharply to -12 from 2 previously with a sharp contraction in orders, while price pressures increased sharply.
Rising odds for fresh monetary easing by the ECB later in the week in the form of interest rate cuts, the resumption of the QE programme and potential changes in the forward guidance have been hurting the mood in the Eurozone, whilst at the same time keeping buyers at bay. The deep pullback in the pair now carries the potential to visit yearly lows in the 1.1100 region. Today’s results from flash PMIs for the current month should be key.
As writing, the pair is retreating at 1.1145 and faces contention at 1.1125. On the upside, a breakout of 1.1280 would target 1.1350 and 1.1400.