Sterling recovers from one month low despite hints of more QE

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10 August 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling ended its recent run of losses against the US Dollar, rallying back above the 1.30 level overnight after spending most of Tuesday below it.

T
he rally was caused by an announcement that the Bank of England had fallen short of its target to buy long-dated government debt for the first time since 2009, sending UK gilt yields to record lows.

Earlier on Tuesday, the Pound had fallen to a one month low after declining for the fifth straight London trading session against the US Dollar, its largest run since the Brexit vote. Investors remain wary that more quantitative easing from the Bank of England could be on the way later this year.

Bank of England policymaker Ian McCafferty suggested more easing measures would be needed, should the UK’s economic outlook continue to worsen. We think the flash estimate PMIs for August, released at the beginning of September, could prove crucial as to whether we’ll see further action from the Bank of England this year.

Economic announcements out of the UK yesterday were similarly downbeat. A near record high trade deficit of £5.1 billion, slowing manufacturing production and a weak economic growth estimate all boded ill both Britain’s economy and Sterling.

Meanwhile, the Euro recovered around half of its losses versus the Dollar on Tuesday following last week’s impressive nonfarm payrolls report. The Dollar was sent broadly lower yesterday after a disappointing set of economic indicator data that saw a rise in whole inventories and slowing nonfarm productivity.

With announcements among the G4 economies relatively light on the ground today we look to this evening’s monetary policy announcement from the Reserve Bank of New Zealand at 22:00 UK time. The RBNZ is overwhelmingly expected to cut its interest rate by a further 25 basis points, with a cut now almost fully priced in by the market. With the risk of a 50 basis point cut low, we think the New Zealand Dollar could struggle to move lower.

Major currencies in detail:

GBP

Sterling appreciated by 0.5% against the Dollar overnight, brushing aside earlier comments from Ian McCafferty.

There was some further weak economic news yesterday that suggested the UK economy contracted in the month after the Brexit vote in June. The monthly GDP estimate from the National Institute of Economic and Social Research (NIESR) suggested that the UK economy contracted 0.2% last month and grew just 0.3% in the three months to July.

Worryingly, yesterday’s report even claimed that there is now an ‘even chance’ we could see a technical recession in Britain before the end of 2017.

With economic announcements light in the UK throughout the rest of the week, the Pound should continue to be driven by expectations for monetary policy action from the Bank of England.

EUR

The single currency rose 0.3% against the US Dollar and a further 0.3% overnight despite little domestic economic news.

Trade balance data in Germany showed that the trade surplus in Europe’s largest economy narrowed in June following a greater increase in imports than exports. Exports out of the country rose just 0.3%, while imports increased 1.2%, causing the trade balance to fall to €21.7 billion in June from €22.1 billion. These figures suggest that weak global demand is continuing to hold back growth in Germany.

An absence of economic data and policymaker speeches in the Eurozone suggests the Euro is likely to remain range bound for the rest of the week. Next week’s ECB minutes and September’s Governing Council meeting are the next major events. Until we get there, sentiment will likely be the main driver for the single currency.

USD

The US Dollar index declined 0.6% yesterday with slightly underwhelming economic data providing a drag on the currency.

Nonfarm productivity was the main disappointment yesterday with the measure unexpectedly falling in the second quarter by 0.5% on an annualised basis. This no doubt raises concerns about corporate profits and the ability of firms in the US to maintain their current strong rate of hiring.

Contrastingly, optimism among small businesses rose in July. The index from the NFIB increased by 0.1 points to 94.6.

The JOLTS job openings released today are expected to tick upwards and would provide another sign that the US labour market is ready for a second post-financial crisis interest rate hike. US retail sales data on Friday remains the main event this week.

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