Sterling
Markit Economics’ latest PMI print confirmed yesterday that private sector output contracted during July at its fastest pace since the height of the financial crisis in 2009.
The service sector index came in at 47.4, matching the flash estimate of a fortnight ago, but because the manufacturing PMI underperformed the composite index of private sector activity was downgraded from 47.7 to a new seven-year low of 47.5. The gloomy print suggests that the British economy contracted by around 0.4% in the first month following the ‘Brexit’ vote.
However, the Pound remained insensitive to the UK data stream as anxious traders stayed on the sidelines ahead of today’s highly anticipated ‘Super Thursday’ announcement from the Bank of England. Investors expect a 25 basis point reduction in the headline interest rate, but it may take more than that to drive Sterling significantly lower.
Euro
The Pound to Euro exchange rate registered a surprise 50-pip gain yesterday, even as British private sector activity printed at its worst level for seven years and markets prepared for the first move in BoE interest rates since 2009.
Following a raft of explicit hints from BoE policymakers that monetary policy would be loosened in the aftermath of the historic EU referendum, expectations are running high ahead of the bank’s midday announcement. Traders fully expect at least a 25 basis point reduction and are hoping for more aggressive stimulus. This means Sterling may only suffer small losses if the bank cuts rates 0.25% and leaves it at that.
However, if Governor Mark Carney and co. opt to slash rates by more than 0.25% and/or decide to restart the QE bond-buying scheme then we could see GBP/EUR begin to slide back towards July’s post-referendum lows. In addition to actual shifts in monetary policy, the Pound will likely prove sensitive to shifts in policy outlook. The BoE’s inflation report is predicted to show that inflation may surge over the next 12 months in reaction to the devaluation of Sterling but policymakers will probably look through this and maintain an easing bias going forward. The extent of the bank’s dovish rhetoric may well prove decisive in how well/badly the Pound performs following the announcement.
US Dollar
‘Cable’ remained close to two-week highs yesterday but analysts are calling for the Pound to strike a new three-decade low against the US Dollar over the next three months.
For GBP/USD to sink below the post-‘Brexit’ low, the Bank of England will need to launch a comprehensive stimulus package. Following an initial 10% plunge, Sterling has remained remarkably resilient in the aftermath of the EU vote. However, this could all change if the UK central bank embarks on an aggressive easing scheme later today. Commentators have often used the term ‘Super Thursday’ sarcastically to describe the BoE’s new format of announcing monetary policy, minutes from the meeting and inflation forecasts all at once because in the past policymakers have not opted to make any significant changes. But if the officials from Threadneedle Street act decisively today it could breathe new life into the term.
The Pound is liable to suffer steep losses if the BoE cuts rates into negative territory or launches a substantial new round of QE with a pledge to continue loosening policy. Alternatively, Sterling could surge if the BoE wrong-foots markets with an interest rate hold. Anything in between would likely weigh on GBP/USD but to a lesser extent.
Canadian Dollar
The Pound to Canadian Dollar exchange rate inched higher yesterday to strike a monthly high. However, Sterling’s recent rallies could collapse this afternoon if the Bank of England announces a powerful package of stimulus measures. Crude oil rallied 3% yesterday as US gasoline inventories fell much faster-than-expected. If oil prices remain well bid today, the commodity-correlated ‘Loonie’ stands to gain.
Australian Dollar
Sterling remained on good form against the Australian Dollar yesterday following the Reserve Bank of Australia’s decision to cut rates from 1.75% to a new record low of 1.50% earlier in the week. However, GBP/AUD is still around 20 cents weaker than it was prior to the ‘Brexit’ referendum on June 23 and the Pound’s pains may come into sharper relief this afternoon if the BoE strikes a strong dovish tone.
New Zealand Dollar
The Pound strengthened by around 150 pips against the New Zealand Dollar yesterday as investors bet that the Reserve Bank of New Zealand would start slashing interest rates in August. Markets have priced a 96% chance of a 25 basis point reduction this month and many expect the RBNZ to follow that with another rate cut in the near future in order to stoke domestic inflation in the face of receding global price pressures. The dovish shift in RBNZ sentiment weighed on the high-beta ‘Kiwi’.
Data Released
12:00 GBP Bank of England Rate Decision (AUG 4)
12:00 GBP BOE Asset Purchase Target (AUG)
12:00 GBP Bank of England Inflation Report
15:00 USD Factory Orders (JUN)