BoE Fails to Help British Pound Gain Traction
What’s been happening?
Pound Sterling – UK Markets
The British pound closed the day modestly lower vs the dollar while remaining virtually unchanged against the euro on Thursday as the Bank of England preserved its cautious tone amid Brexit uncertainty and failed to help the currency. As expected, the BoE’s Monetary Policy Committee announced that it held the policy rate unchanged at 0.75% and said that it kept the asset purchase facility steady at €435 billion. “Economic outlook will depend significantly on Brexit, the BoE forecasts continue to assume a smooth transition," the bank said in its policy statement and repeated that the policy response to Brexit could be in either direction. In its updated economic projections of the Quarterly Inflation Report (QIR), the bank revised its 2019 GDP growth expectation up to 1.5% from 1.2% reported in the previous QIR.
In his remarks, Governor Mark Carney said that interest rate increases would be required after a smooth Brexit. “We are talking about more withdrawal of monetary stimulus, but limited relative to history,” Carney explained. "There are insufficient hikes in the current market curve. More withdrawal of monetary stimulus needed, just not at this meeting." Commenting on the potential negative impact of a hard Brexit, Carney said their data showed that, on average, businesses were expecting the output to go down by 3.5%. “Until Brexit process is concluded, there will be a chance of no-deal, this is the default option," Carney added.
Earlier in the day, the IHS Markit’s data showed that the Construction PMI, which dipped below the 50 marks to show contraction in March, rebounded to 50.5 in April to come in slightly above the market expectation of 50.3.
US Dollar – US Markets
The greenback closed the day higher against both the euro and the pound sterling on Thursday as markets continued to price the lower probability of the Fed going for a rate cut following Chairman Powell’s optimistic remarks on the economic outlook yesterday.
Additionally, the U.S. Census Bureau announced that factory orders in March increased by 1.9% on a monthly basis to beat the market expectation of 1.5%. Moreover, nonfarm productivity in the first quarter increased at its strongest pace since 2014 with 3.6% while unit labour costs in the same period fell 0.9% to hint at a soft wage inflation reading in tomorrow’s labour market data.
Euro – European Markets
The shared currency struggled to find demand on Thursday as the data didn’t signal a meaningful recovery in the economy. Destatis reported that retail sales in Germany declined by 0.2% on a monthly basis in March. Moreover, the IHS Markit’s Manufacturing report showed that the business activity in the manufacturing sector in Germany contracted in April with the headline PMI coming in at 44.4. Commenting on the data, “The struggles in the car industry continue to ripple through the German manufacturing sector. From electronics and chemicals to basic metals and machinery, firms in almost all sectors are reportedly feeling the effects of the automotive slowdown,” said Phil Smith, Principal Economist at the IHS Markit. On a positive note, the Eurozone Manufacturing PMI improved slightly to 47.9 in the same period from 47.5 in March.
What’s coming up?
UK: The IHS Markit will release its Services PMI report on Friday.
US: The U.S. Bureau of Labor Statistics’ employment report, which will include nonfarm payrolls, unemployment rate, average hourly earnings, and labour force participation rate, will be featured in the U.S. economic docket ahead of the IHS Markit’s and the ISM’s non-manufacturing PMI data.
EU: The Eurostat will release the Consumer Price Index and the Producer Price Index figures on Friday.