ECB Forum meeting and approaching BOE interest rate decision in focus
What’s been happening?
Pound Sterling – UK Markets
Sterling failed to make gains at the start of the new trading week, due to a lack of positive data. The Bank of England’s August rate increase is in question as the UK economy is seen to be faltering. BOE officials will be gathering this week for their June policy meeting, which has the potential to lay the groundwork for an increase later in the summer to 0.75% from 0.5%. Investment Bank Goldman Sachs economist Adrian Paul said in a note published yesterday, - “The minutes are likely to allude to intensifying political risks associated with Brexit negotiations and we expect the Committee to remain equivocal over the precise timing of increment tightening.”
Brexit concerns continue to remain a significant negative factor for the Pound. The government was subjected to a further defeat in the House of Lords over a significant vote on the EU withdrawal bill and there was also fresh speculation that a Brexit deal would not be finalised until late 2018 as disagreements over the Irish border continue.
US Dollar – US Markets
The US National Association of Home Builders (NAHB) housing index fell 2 points to 68 in June and lumber costs are a likely cause. Rising lumber prices have added nearly $9,000 to the price of a new single-family home since January 2017, partly because of tariffs on Canadian lumber that went into effect last year. Builders are optimistic about the US housing market conditions, however their view about current and future housing affordability is less positive.
Atlanta Fed President Raphael Bostic said yesterday that ‘the economic optimism among business contacts in the central bank districts has almost completely faded’ because of trade fears. Bostic said that he agrees with the 0.25%-point interest rate hike the Federal Open Market Committee approved last week, though he remains sceptical about the path of increases ahead. The Atlanta Fed maintains a widely followed economic tracker called GDPNow that is estimating 4.8% growth for the second quarter.
Euro – European Markets
The Euro failed to gain against other major currencies yesterday and continued the same downwards trend this morning. Volatility brought about by increasing trade fears and recent negative data from Germany has been damaging for the Euro lately. The German central bank slashed its growth forecast for this year on Friday blaming trade and political concerns which have made the outlook for the economy more uncertain. However, the German Bundesbank came in with a more positive outlook yesterday, saying that the economy should rebound in the second quarter after a weak start to the year. The Bundesbank said that along with higher state spending, a humming construction sector and strong private consumption should support the economy in Q2.
The European Central Bank’s President Mario Draghi gave an introductory speech earlier this morning as the ECB Forum on Central Banking, in Portugal began. In the speech Draghi expressed that there is evidence that broad-based economic growth is beginning to generate positive pricing dynamics, however that significant monetary accommodation is still needed. The ECB is expected to remain patient in determining timing of first rate hike. EUR had seen a fall of 0.74% against USD and 0.10% against GBP at the time of writing.
What’s coming up?
UK: The UK government's flagship Brexit bill - The European Union (Withdrawal) Bill – will be back for debate at the House of Commons on Wednesday. However, markets will be putting most of their focus on Thursday’s BoE interest rate decision as well as release of the monetary policy outlook summary.
US: Federal Reserve’s Jerome Powell will be giving speech tomorrow afternoon, where markets will be looking out for any insights about the outlook of interest rate hikes for the rest of this year.
EU: The ECB President Mario Draghi will be giving another speech tomorrow, where markets can expect to get a further insight into the bank’s outlook for Eurozone economic growth. Preliminary Markit manufacturing and services PMI for the month of June will be out on Friday.