Sterling edges lower ahead of today’s Financial Stability report

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5 July 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 edged downwards this morning, perilously close to its 31 year low against the US Dollar, while falling to a fresh two-and-a-half year low against the Euro ahead of this morning’s Financial Stability report from the Bank of England.

B
ank of England Governor Mark Carney will be speaking at 11:00 this morning following the central bank’s Financial Stability report and could be key for Sterling today. Carney will likely signal the likelihood of further monetary policy easing in the UK in the near term following last month’s surprise Brexit vote. Further hints that an interest rate cut could be imminent at the BoE’s meeting next week will likely send the Pound lower today.

Monday saw a fairly dismal construction report from Markit, which pointed further to a slowdown in economic growth in the second quarter of the year following a disappointing start to 2016. Construction growth in the UK slowed sharply in June to its lowest level since 2009 in another clear sign that referendum uncertainty is delaying both investment and consumption in the domestic economy.

With trading in the US very quiet on Monday due to Independence Day, attention turned to the other major economies currencies around the world. The Australian Dollar was one of the day’s best performing currencies after the weekend election produced no clear winner.

Commodity currencies in general were well supported yesterday as investors ramped up expectations that central banks around the world will provide increased stimulus measures in order to offset the impact of the Brexit vote.

Meanwhile, the latest data from the Swiss National Bank suggested that it intervened by the most since January 2015 in order to protect the Swiss Franc from a sharp appreciation following the UK’s referendum vote.

Major currencies in detail:

GBP

Sterling dipped 0.6% against the US Dollar this morning, with investors anxious ahead of Mark Carney’s comments this morning.

Britain’s construction industry suffered its worst contraction in seven years in June and its first since 2013 according to the latest PMI. The index from Markit plunged to 46 from 51.2 in what could be a sign of worse to come. We think the UK economy is on course to contract in the third quarter of the year.

Chancellor George Osborne also spoke yesterday, outlining possible plans to cut corporation tax in an attempt to maintain investment into the UK.

With the services PMI from Markit this morning not taking into account the Brexit vote, attention today will be firmly on Governor Carney.

EUR

The Euro traded within a narrow band on Monday, with a lack of any significant announcements keeping Euro volatility to a minimum.

Investment confidence in the Eurozone plunged to its lowest level in eighteen months in July, with confidence in the bloc badly hit following Britain’s vote to leave the EU. The index from Sentix fell to 1.7 from 9.9 in June, well below expectations, with the report warning that the European Central Bank now faces huge pressure to ramp up its easing measures in the coming months.

ECB member Coeure spoke yesterday, suggesting that it is too early to say how the Eurozone will be impacted by last month’s Brexit.

Both retail sales and the Markit services PMI will be released this morning, although will likely be overlooked by the markets given both were recorded prior to last month’s referendum result.

USD

With the US off on Monday to mark Independence Day, the US Dollar was little changed against its major peers, ending the session 0.2% lower.

There were no economic announcements in the US on Monday. Attention this week will instead be on the Federal Reserve meeting minutes on Wednesday and, more importantly, Friday afternoon’s labour report. We think that any number close to the 200,000 mark could cause investors to reprice a rate hike by the Fed in December.

In the meantime, Fed member William Dudley will be speaking at 19:30 UK time this evening, which could provide moderate volatility given his seniority in the FOMC.

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