Looking for Policy Loosening

Sterling struggles as manufacturing PMI disappoints & the RBA cut rates ahead of an important speech from Fed Chair Powell today.

Previous Day's Market Highlights

Sterling continued its recent struggle on Monday, with the pound sliding as poorer than expected manufacturing PMI data combined with ongoing political uncertainties to result in subdued demand for sterling. Data showed the manufacturing industry slipping into contraction in May, with a PMI level of just 49.4 - a 34-month low for the index. The drop in activity has been driven largely by a significant drop in pre-Brexit stockpiling, as well as companies drawing down on existing inventories instead of placing new orders. Meanwhile, there was once again no escaping the political sphere as Tory leadership frontrunner Boris Johnson officially entered the leadership contest, promising to “come out deal or no deal on October 31”. The prospect of a Prime Minister advocating a no-deal Brexit, and the likely economic implications which would follow, continue to dent sterling’s attraction. Over the day, sterling fell 0.3% against the euro, hitting a fresh 5-month low of €1.1265. Meanwhile, against the dollar, sterling closed unchanged, with rallies quickly sold into, failing to take advantage of a weaker greenback. 
Elsewhere, markets continued to strike a relatively tentative tone, with ongoing global trade tensions continuing to keep a lid on volatility. Manufacturing PMI data was released from almost every developed economy, in general showing a global softening of activity in the sector. From the eurozone, final data for May showed the sector remaining in contraction for a 4th consecutive month, with the PMI falling to 47.7. The euro however managed to gain against peers, largely due to dollar weakness, adding 0.4% over the course of the day. In the US, ISM manufacturing PMI fell for a 3rd consecutive month, tumbling to 52.1 - the lowest level since October 2016. This, combined with markets continuing to price rate cuts from the Federal Reserve and increasing trade tensions, sent the greenback 0.5% lower over the day - falling to a 3-week low against a basket of peers. 
Overnight, the Reserve Bank of Australia (RBA) announced a 25bps interest rate cut, bringing rates to a fresh record-low of 1.25%. Markets had 100% priced in the move, which has been brought about due to continued below-target inflation in addition to a slack labour market. However, while today’s cut was clearly signalled in advance, the RBA gave no explicit comments on the policy outlook, leaving the door open to further cuts later this year. The Australian dollar has shown a relatively muted reaction, with the monetary policy statement giving little fresh information for markets to mull over. 

Away from FX, equity markets traded in relatively quiet fashion. In Europe, the Stoxx 600 gained 0.3%, while the US benchmark S&P 500 fell 0.3%. Finally, oil prices continued their recent decline, falling to 4-month lows as concerns over trade persisted. Global benchmark Brent slid 1.2%, while US WTI crude fell 0.5%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1255 1.1681 1.1237 3.80%
GBP/USD 1.2685 1.3080 1.2558 3.99%
EUR/USD 1.1265 1.1271 1.1107 1.46%
GBP/AUD 1.8160 1.8716 1.8117 3.20%
GBP/NZD 1.9227 2.0021 1.9175 4.23%
GBP/CAD 1.7035 1.7612 1.6902 4.03%

Today's Market Highlights

Today’s main event comes not in the form of a data release, but in the shape of an eagerly awaited speech from Fed Chair Powell this afternoon. Recently, as frequent readers will be aware, markets have aggressively increased their bets on the Fed cutting rates this year, with concerns that escalating trade tensions and the imposition of tariffs will tip the US economy into recession. Futures contracts show that one 25bps rate cut this year is fully priced in, with two 25bps cuts an 82% chance - just a month ago, the chances of a rate cut this year were only 47%. In light of this, market participants will be looking for the Fed Chair to open the door to a loosening of policy later this year, in line with recent comments from Vice Chair Clarida that more accommodative policy would be warranted should the economy outlook dim. Should Powell strike a relatively dovish tone, this would likely pressure the dollar due to the prospect of lower rates on the horizon. However, should Powell fail to open the door to a cut, markets could experience a violent reaction - especially equities and Treasuries which remain particularly sensitive to Fed policy shifts. 
Elsewhere, in the European session, markets will have a couple of data releases to look over. From the eurozone, flash CPI figures for May are due, with data expected to show a moderation in inflation as the effects of Easter seasonality fade. Headline CPI is expected at 1.3%, a level not seen in over a year, while the less-volatile core CPI measure is expected at 0.9%. The continued sluggish pace of price increases provides the ECB with a headache ahead of Thursday’s policy decision, with policymakers ability to stimulate the economy appearing limited. Meanwhile, from the UK, construction PMI is unlikely to attract significant attention - with focus remaining on political developments - with the construction industry set to remain just inside expansionary territory. From the US, factory orders and revised durable goods data will be released, though Powell’s speech will be of much greater interest. 
Finally, markets will also take their cue several other central bank speakers throughout the day. Of primary importance will be RBA Governor Lowe, with markets likely to look for further clarity on the policy outlook. Also eyed will be Fed voter Williams and Fed Board member Brainard.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Construction PMI (May) 50.5 50.5
10:00am EUR Flash CPI (y/y - May) 1.3% 1.7%
10:00am EUR Flash Core CPI (y/y - May) 0.9% 1.3%
10:00am EUR Unemployment Rate (Apr) 7.7% 7.7%
3:00pm USD Factory Orders (Apr) -0.9% 1.9%