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July 2016

BoE stability report is likely to provoke further volatility

Published: Tuesday 05 July 2016

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  • BoE stability report is likely to provoke further volatility
  • Disappointing Aussie retail sales and trade balance 
Yesterday was Independence Day in the US therefore the markets were relatively quiet. The Pound fell further in these thin markets following the release of the UK’s Construction PMI. The print was the weakest reading since 2009 – the purchasing manager’s index or PMI are a forward looking indicator base on surveyed purchasing managers in the construction industry. This implies that the future growth of this sector is likely to contract. Although the construction sector contributes a small percentage to the UK’s GDP it is the first sign of what the post Brexit era may hold.  If today’s Services PMI follows suit by falling into contraction territory too, we should see losses in GBP extend at a much more aggressive pace. This will raise the likelihood of the Bank of England injecting additional stimulus this summer in an attempt to dampen the short-term impact of Brexit uncertainty on the real economy.  

The Reserve Bank of Australia kept rates on hold at the all-time low of 1.75% as widely expected. RBA Governor Glenn Stevens maintained a neutral stance in his statement; however, he reiterated that the Reserve Bank was willing to act if needed.  So further cuts are not off the table and traders are pricing in a near 50% chance that the RBA will move in August - that percentage will grow should inflation disappoint on the 27th of July. 

In the aftermath of the EU referendum, investors have found appetite for risk and have flooded into currencies offering a higher rate of interest like the NZD or AUD. This makes it more difficult for an exporting nation to be competitive and this is reflected in Australia’s trade deficit which widened further in May, as uneven international markets offset the competitive advantage offered by a weak local currency.

Today’s Bank of England Financial Stability Report is likely to provoke further volatility for the Pound. The report will take a detailed look at the risks faced by the banking sector following the Brexit vote and the underlying risks facing the economy.  Bank of England’s Governor Carney will then hold a press conference and will undoubtedly be asked further questions on the bank’s likely response following last Friday’s comments that cutting interest rates might not be the only action that the Bank of England are considering. 
 

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Today's Major Economic Releases 

 
Market BST Data/Event Previous Expected
GBP 09:30 UK: Services PMI 53.5 53.1
EUR 10:00 EU: Retail sales m/m 0.0% 0.4%
GBP 10:30 BoE Financial stability report    
USD 15:00 US: Factory orders m/m 1.9% -0.8%

FX Research by Denzil Rickerby 

Daily Currency Analysis with Joe De Berniere 

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