Morning Report: 3 August 2017

3rd August 2017 By: Ranko Berich

GBP Sterling had an uneventful day yesterday, gaining slightly versus USD and weakening to the euro, as markets awaited today’s crucial data and central bank events. Markit’s Construction Purchasing Managers Index fell sharply in July, reaching an 11 month low as commercial construction fell sharply. Heightened political and economic uncertainty were the primary drivers mentioned in the report. Today is a new day however, and crucial Services PMI figures will be released at 09:30 BST, followed by the Bank of England’s latest Inflation Report at 12:00, which will be accompanied by a rate decision, meeting minutes, and a Monetary Policy Summary. Rates are likely to remain unchanged, but after somewhat hawkish comments from previously dovish Chief Economist Andy Haldane, this outcome is not quite a sure thing. The tone of the Inflation Report and discussion among MPC members will be very relevant for sterling, as they made provide a hint about the Monetary Policy Committee’s views on the economy and the likely path of rates. Governor Mark Carney will present the Inflation Report in a press conference at 13:30 BST, and is likely to face some sharp questioning from journalists about the seeming ambiguity in recent speeches by MPC members.

EUR EURUSD rocketed to fresh highs yet again yesterday, as the euro remained well bid on other crosses such as EURCHF and EURJPY. Data flow was light for the euro yesterday apart from a 0.1% contraction in Producer Prices in June, although this was no barrier to the euro strength seen late yesterday and overnight. This morning has already seen the release of Services Purchasing Managers Indices for key eurozone economies, all of which remained comfortably in growth territory. Eurozone Retail sales figures will be released at 10:00 BST.

USD The dollar remained firmly on the back foot yesterday, especially against the euro. ADP’s estimate of Non-Farm Payrolls came in slightly shy of expectations at 178,000, although this figure is still in line with the broad upwards trend seen in the labour market. Today’s data calendar is livelier than yesterdays, with Challenger Job Cuts at 12:30 BST, weekly Unemployment Claims at 13:30, and Services Purchasing Managers Indices from Markit and ISM at 14:45 BST and 15:00.

CAD “What goes up must come down” is a nice aphorism for many things in life, and occasionally even proves applicable to currency markets, as it has been to the loonie in recent days. CAD continued to weaken yesterday and overnight as markets considered the possibility that the loonie was overbought during its spectacular three month rally from May this year. US Inventory data showed North American crude stockpiles continuing to fall yesterday, although output continued to expand, reaching the highest level since July 2015 according to the Energy Information Administration. Crude oil spot prices did recover slightly yesterday, although this did little to support the loonie.

UK news

  • Reuters: Bank of England set to stay on hold as Brexit risks loom. The Bank of England looks set to keep interest rates at a record low once again on Thursday with investors looking for signs that, faced with Brexit, it is getting nearer to raising rates for the first time in a decade. When they last met in June, Governor Mark Carney and his fellow rate-setters voted by a narrow 5-3 margin to keep Bank Rate at 0.25 percent. The surprisingly close decision pushed up sterling and British government bond yields as investors pulled forward their expectations of a rate hike. Chief Economist Andy Haldane said soon after that he was close to voting for a hike too, adding to speculation that the BoE might soon be ready to follow the lead of the U.S. Federal Reserve and raise borrowing costs. With unemployment at a four-decade low and inflation above the Bank’s target, the case had seemed to be growing for the BoE to at least reverse the emergency rate cut it made after last year’s shock decision by voters to leave the European Union.
  • BBC: ‘No rate rise’ predicts former MPC member. A former member of the Monetary Policy Committee, Adam Posen, has predicted that the Bank of England will not change interest rates this month. The MPC will publish its regular decision on borrowing costs at midday. Mr Posen, interviewed on the Today programme on Radio 4, said rates may not rise until next year. “I think they are not going to vote for a rate hike at this time and probably not until at least November and maybe not even until 2018”, he said.