BoE Keeps Policy Unchanged, Trump Announces New Tariffs
What’s been happening?
Pound Sterling – UK Markets
The British pound posted modest losses against both the dollar and the euro on Thursday. As expected, the Bank of England's Monetary Policy Committee held the policy rate unchanged at 0.75% with a unanimous vote and kept the asset purchase facility steady at €435 billion as well. "Gradual and limited increase in interest rates appropriate, but needs some recovery in global growth in addition to previous smooth Brexit assumption," the BoE said in its policy statement and repeated that the monetary policy response to whatever form Brexit takes will not be automatic and that rates could go in either direction. Additionally, the updated economic projections in the Quarterly Inflation Report showed that the bank was expecting the economy to expand by 1.3% in 2019, compared to 1.5% reported in May's publication. Regarding the currency’s market valuation, “if Brexit proceeds smoothly, sterling is likely to appreciate and market interest rate expectations will rise," the BoE noted.
The final reading of the IHS Markit/CIPS’ Manufacturing PMI came in at 48 in July to show that the business activity in the manufacturing sector continued to contract. “A killer combination of economic uncertainty and the weakest production levels for seven years, battered the manufacturing sector into contraction for the third consecutive month in July,” Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply (CIPS), said. “New orders fell as businesses used up stockpiled materials, EU businesses moved supply chains out of the UK and weakness in the global economy stifled demand from both domestic and export markets.”
US Dollar – US Markets
The greenback continued to outperform its rivals on Thursday as FOMC Chairman Powell’s remarks from Wednesday weighed on the probability of one more rate cut and boosted the demand for the currency. However, uninspiring data from the US caused the US Dollar Index to reverse its course and start erasing is gains.
Although the IHS Markit’s Manufacturing PMI’s final reading in July came in at 50.4 to beat the market expectation of 50, the disappointing Manufacturing PMI data showed a loss of momentum in the sector’s business activity. The ISM’s PMI slumped to 51.2 in July and fell short of analysts’ estimate of 52. Commenting on the IHS Markit’s findings, "US manufacturing has entered into its sharpest downturn since 2009, suggesting the goods-producing sector is on course to act as a significant drag on the economy in the third quarter," said Chris Williamson, Chief Business Economist at the IHS Markit. “The deterioration in the survey’s output index is indicative of manufacturing production declining at an annualised rate in excess of 3%."
In the second half of the day, US President Donald Trump announced additional tariffs on Chinese imports and triggered a flight-to-safety in the markets. The 10-year US Treasury bond yield slumped to its lowest level since late 2016 by losing nearly 7% on the day and weighed on the dollar, causing the US Dollar Index to continue to push lower. "Trade talks are continuing, and during the talks the US will start, on September 1st, putting a small additional tariff of 10% on the remaining 300 billion dollars of goods and products coming from China into our country," Trump tweeted out. "This does not include the 250 billion dollars already tariffed at 25%."
Euro – European Markets
The shared currency recovered a small portion of the losses that it suffered against the greenback this week but this move seemed to be a product of broad dollar weakness rather than euro strength.
Thursday’s data showed that the manufacturing sector in major EU economies continued to lose momentum in July with the IHS Manufacturing PMI for Italy, France, Germany, and the eurozone all coming in below the 50 mark in July. "After displaying a broadly sideways tendency throughout the second quarter, the PMI tumbled in July to signal a level of weakness in the Germany manufacturing sector not seen for seven years,” Phil Smith, Principal Economist at IHS Markit, which compiles the Germany Manufacturing PMI survey, said. Regarding the overall performance, “The Eurozone PMI dashboard is a sea of red, with all lights warning on the deteriorating health of the region’s manufacturers,” noted Chris Williamson, Chief Business Economist at IHS Markit. “July saw production and jobs being cut as the fastest rates for over six years as order books continued to decline sharply.”
What’s coming up?
UK: The IHS Markit’s Construction PMI will be the only data featured in the UK economic docket on Friday.
US: The US Bureau of Labor Statistics will release the jobs report, which is expected to show the nonfarm payrolls rise 164K in July following June’s 224K reading. The unemployment is seen remaining unchanged at 3.7%. The ISM-NY Business Conditions Index and the University of Michigan’s Consumer Sentiment Index will be published on Friday as well.
EU: The Eurostat will publish the retail sales and the Producer Price Index (PPI) data.