Caution on Threadneedle Street

The BoE’s cautious tone pressures the pound as rates remain on hold, ahead of today’s eurozone PMIs while markets continue to digest the dovish Fed.

Previous Day's Market Highlights

As expected, the Bank of England (BoE) kept monetary policy settings unchanged on Thursday, with policymakers unanimously voting to keep interest rates on hold at 0.75%, though a decidedly cautious tone emerged from the BoE's policy statement. The MPC maintained their tightening bias, reaffirming the need for gradual and limited rate increases to bring inflation in line with target over the BoE's forecast horizon. This was however the only optimistic part of the BoE's statement, with emphasis placed on the intensifying risks to the global and UK economic outlooks - largely in the shape of increasing trade tensions and the risks posed by a potential no-deal Brexit. These factors resulted in the Bank downgrading their 2nd quarter growth forecast, with policymakers now expecting the UK economy to stagnate in Q2, compared to 0.2% growth previously. The BoE's cautious tone and downgraded growth expectations exerted downward pressure on the pound. Sterling fell 0.15% against the euro over the course of the day, the first daily loss in 3 trading days. Against the dollar, sterling recorded a daily gain of around 0.5%, solely due to a weaker greenback, though the pound pared some of its advance after the BoE's policy announcement. The pound largely ignored May retail sales figures, which were slightly softer than expectations, while also shrugging off the final 2 MPs ballots in the Conservative Party leadership contest - with Boris Johnson now facing Jeremy Hunt in a ballot of party members. 
 
Elsewhere, the dollar tumbled as markets priced in monetary policy easing after the Federal Reserve's dovish policy stance on Wednesday evening. Against a basket of peers, the dollar fell 0.55% to a 2-week low. The greenback was also pressured by below forecast manufacturing data from the Philadelphia Fed, with the regional gauge of manufacturing activity falling to a 5-month low, following a similar fall in the New York Fed's gauge earlier in the week. Meanwhile, all other major currencies chalked up a daily gain against the weakening dollar. The euro added 0.5%, while the Aussie, Kiwi and Canadian dollars all added more than 0.6%. The best performer however was the Swiss franc, gaining more than 1.3% against the dollar. The Swissie's strength is likely due to the historically strong performance of the franc during Fed easing cycles, hence the currency came under significant demand. The yen also gained, and held its ground overnight despite inflation softening, headline CPI increasing at just 0.7% on a year-on-year basis last month. 
 
Turning back to monetary policy, while the Fed and ECB prepare for possible rate cuts, and the BoE strike a cautious tone, one central bank remains hawkish. The Norges Bank announced their 3rd 25bps rate hike in the last 12 months on Thursday, bringing benchmark interest rates to 1.25%, leaving the Bank as the hawkish outlier among G10 central banks. Policymakers stated that rates are likely to rise "slightly faster" than earlier projected, largely due to continued above target inflation and strong GDP growth - a further hike is likely in December. The hawkish rhetoric was a positive for the Norwegian krone, with the NOK gaining more than 1% over the day, rallying to its best levels since late-April. 
 
Away from FX, the general theme was to buy everything that wasn't nailed down, with equities, bonds and commodities all rallying. The prospects of looser monetary policy saw equity markets on both sides of the Atlantic record gains. In Europe, the pan-continental Stoxx 600 added 0.5%, while the US benchmark S&P 500 added 1%, closing at a record high. Bonds also rallied on the chances of looser policy, with US 10 year yields (which move inversely to price) hitting their lowest levels since November 2016. Finally, commodities prices also firmed. Oil prices gained as Middle East tensions escalated, with Brent and WTI adding more than 4%. Meanwhile, the escalating tensions, and the prospect of Fed rate cuts, saw gold gain almost 2%, with prices hitting a 5-year high.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1245 1.1376 1.1141 2.07%
GBP/USD 1.2690 1.2763 1.2506 2.01%
EUR/USD 1.1285 1.1348 1.1151 1.74%
GBP/AUD 1.8330 1.8422 1.8113 1.68%
GBP/NZD 1.9290 1.9456 1.9053 2.07%
GBP/CAD 1.6745 1.7135 1.6674 2.69%

Today's Market Highlights

A busy trading week concludes with a moderately lighter economic calendar, though market participants will have plenty to chew over while continuing to digest the Federal Reserve's policy decision. Among the data releases, June flash PMI figures from the eurozone are likely to be the main focus. The monthly survey is set to show continued divergence between the manufacturing and services sectors, with the latter continuing to drive growth across the euro area. Markets expect manufacturing PMI at 48.0, below the crucial 50.0 mark, signifying contraction for a 5th consecutive month. Meanwhile, the services sector is set to continue its relatively solid pace of expansion, with the PMI set to remain unchanged from May's level of 52.9. With the prospects of further stimulus from the ECB on the horizon, markets and policymakers alike will closely examine the incoming data points to try and gauge the appropriate response. A below forecast release will increase the chances of the ECB feeling the need to act, and likely weaken the euro. 
 
Elsewhere, impactful UK data is thin on the ground, with monthly public sector borrowing figures typically of little interest for the pound. Sterling should therefore remain within its recent, well-defined trading ranges, as political uncertainties continue to cap any rallies. Across the pond, Canadian retail sales figures for April are the main data point, with markets expecting sales to have increased at just 0.2% on a month-on-month basis, the slowest pace since January. US data is relatively light, with May's new home sales figures likely overshadowed by the ongoing market reaction to the Fed's dovish policy shift. Speaking of the Fed, a number of speakers are due today, all having the potential to cause volatility with markets still trying to gauge the degree of easing that will take place this year. Vice Chair Clarida speaks during the morning session, before Brainard, Mester and Daly provide comments throughout the afternoon and evening. 
 
Looking ahead to next week, the data calendar is relatively light compared to the past 7 days. Of most interest will likely be next weekend's (28th June) G-20 summit, where Presidents Trump and Xi are due to hold a further round of trade talks. While the outcome of such discussions remains far from certain, and immediate agreement of a deal is unlikely, markets will be looking for a relatively conciliatory tone which would help to underpin risk appetite. Elsewhere, the RBNZ provide their latest policy decision, with no rate changes expected, while final Q1 GDP figures are due from both the UK and US. Finally, next week concludes with a couple of inflation releases, with eurozone CPI and US core PCE, the Fed's preferred inflation gauge, both due.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:00am EUR Flash Manufacturing PMI (Jun) 48.0 47.7
9:00am EUR Flash Services PMI (Jun) 52.9 52.9
9:30am GBP Public Sector Net Borrowing (May) 5.1bln 4.97bln
1:30pm CAD Retail Sales (m/m - Apr) 0.2% 1.1%
1:30pm CAD Retail Sales ex-Autos (m/m - Apr) 0.3% 1.7%
3:00pm USD Existing Home Sales (m/m - May) 5.25mln 5.19mln