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July 2016

Carney predicts rate cuts and GBP falls

Published: Friday 01 July 2016

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  • Carney predicts rate cuts and GBP falls
  • EU credit rating downgraded

Boris Johnson rounded of a successful Brexit campaign by announcing he would not attempt to become the Prime Minister on this occasion. The markets didn't react but traders and news reporters were all a bit stunned until it was clear that Michael Gove had announced his candidacy and stuck the knife into poor old Boris. Well at least Jamie Oliver doesn't have to leave the country now...so that's a blessing I know we are all grateful for.
 
The Governor of the Bank of England, Mark Carney finished the first half of the year by giving heavy hints that the BOE would cut interest rates in the months ahead; maybe as soon as 14th July or maybe on 4th August. A weaker Pound will cause some inflationary pressure but cutting the base rate will weaken it further and we saw some of that in Thursday afternoon trade. Interest rates have always been a very blunt instrument and a double edged sword. I know that is a bit of an oxymoron but you take my point. As mentioned above, Sterling slipped on the announcement and there is little in the way of scheduled data that will come to the aid of the Pound today. Traders seem to have sold enough Sterling for now and the Pound has stabilised this morning but the unexpected is to be expected at the moment.
 
The Euro would have strengthened against the Pound to a greater degree but for S&P downgrading the rating for EU debt from AA to AA+ and changing their outlook from Stable to Negative. The European Central Bank is hinting that they might need to loosen their rules on the types of debt they will purchase under their quantitative easing program. They haven't implemented that yet though.
 
In most currency pair, the Pound has fallen, mounted a small recovery as profits have been taken by speculators and then dropped back to the bottom of its range. In the GBPUSD rate, this is most pronounced and the Pound is now supported by a trendline which has underpinned this exchange rate since 1987. That would suggest it will continue to do so but, as we are repetitively told by the press, these are unprecedented times and that support could ebb away unless the UK government doesn't get on with the business of delivering a solid renegotiation of Britain's relationship with the EU. No pressure then.
 
For major data, we need to look West from whence the US manufacturing sector Purchasing Managers Index will be released. The markets are expecting a small uptick but the uncertainty of the Brexit vote may well have dimmed enthusiasm in all sectors, so don't be surprised if the USD weakens before the 4th July extended weekend.  Ironically, it is the day the American's celebrate independence from the UK. History repeating itself in a crazy twisted way.
 
And today marks the 100th anniversary of the commencement of the Battle of Albert, the first campaign of the Battle of the Somme. In this one day of fighting, Britain and our allies suffered 57,470 casualties of which 19,240 servicemen lost their lives. To visualise that number of people is difficult but if you watch the Wimbledon highlights today, with all the spectators, the players, umpires, staff, ball boys & girls and the press,  there are just about 40,000 people in Wimbledon on a busy day of the championships. It's sobering isn't it. 
 

Late Night visit

 
Donald Trump was sitting in his office late one night when Satan appeared before him. The Beelzebub said to Trump, "I have a proposition for you. You can become President, get a second term in office, have great support from congress and the senate and retire with a fantastic speaking tour contract and a whole heap of directorships in fortune 100 companies. The US public will adore you, your colleagues will stand in awe of you and you will make obscene amounts of money. All I want in exchange is your soul, your wife's soul, your children's souls, the souls of your parents and relatives and the souls of all your friends and colleagues."
Trump frowned for a moment before saying, "So, what's the catch?"
 

Today's Major Economic Releases 

 
Market BST Data/Event Previous Expected
GBP 09:30 UK: Manufacturing PMI 50.1 50.0
EUR 10:00 EU: Unemployment rate 10.2% 10.1%
USD 15:00 US: ISM manufacturing PMI 51.3 51.3
USD 15:00 US: ISM manufacturing prices 63.5 63.9

FX Research by David Johnson

Daily Currency Analysis with William Busby

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