Sterling fell sharply last week as concerns increased about the possibility of a ‘no deal’ Brexit. The new Prime Minister appears to be driving towards an impasse with key EU leaders. The pound hit a 28-month low against the USD and a 22- month low against the euro. Brexit developments continue to be watched closely with further talk about what may happen with a vote of no confidence.
Meanwhile, the Bank of England left interest rates unchanged, as expected, at last week’s policy meeting. The Monetary Policy Committee continue to point to a rate rise if we see an orderly Brexit. Given the slowing in the global economy and UK growth, the case for a hike is less compelling. Even if the UK leaves with some form of withdrawal agreement on 31st October, forecasts for the next expected rate hike are now late in 2020.
This week, we will see GDP growth, expected to be much slower at around 0.1% for June. This would be in line with very little growth for the second quarter and a considerable slowdown from the 0.5% growth in the first quarter. These shifts seem to be Brexit related, with stockbuilding in the first quarter and closures in the second quarter around the original Brexit deadline. The July PMI services is expected to increase to 50.8, suggesting that services continue to outperform the rest of the economy. Manufacturing and construction PMIs last week both remained below 50, and therefore showing contraction.
GBPEUR – 1.0902
GBPUSD – 1.2129
Last week’s Eurozone GDP growth showed a slowdown to 0.2% in the second quarter, only half the rate of first quarter. ECB President Draghi noted that the slowdown is concentrated in manufacturing and is a large problem for countries with a big industrial sector. That notably includes Germany. This week’s update for German industrial production will be watched for signs of further pressure. Factory orders may show whether activity is likely to rebound anytime soon. June factory output updates for France and Spain will provide indications of the activity for the Eurozone as a whole.
European inflation fell to 1.1% in July from 1.3% in June, which is likely to give the ECB further cause to think about policy action, with the potential for a rate cut at the next meeting. This week will see the Australian and New Zealand central banks review policy. Both may opt for a further rate cut with the NZ central bank highly likely to do so.
EURUSD – 1.1125
EURGBP – 0.9173
As expected, the US Federal Reserve cut rates by 25 basis points on Wednesday. This was the first reduction for a decade. The Committee also ended its balance sheet rundown two months earlier than previously expected. The accompanying statement had an easing bias, suggesting there could be a further rate cut this year. Fed Chair Powell did, however, say that this move is probably a mid-cycle adjustment rather than the start of a major easing cycle.
Following this, President Trump’s announced a 10% tariff on an additional $300bn of imports from China. The Fed has cited concerns about global developments as a key reason for lowering rates and this latest news was seen adding weight to those concerns. Markets are now pricing almost 100% probability of a further cost in September.
On Friday, the US labour market report suggested that the economy remains in good shape, with employment growth still solid and wage growth up modestly. This week’s US data calendar is very light. The July non-manufacturing ISM is likely to show ongoing growth with a rise to 55.6. Trade talks between the US and China are not scheduled to resume until September.
GBPUSD – 1.2129
EURUSD – 1.1125
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*Interbank rates correct as at 7 am on the date of publishing