Rate Hike Expectations Lift Sterling against Euro and Dollar
What’s been happening?
Pound Sterling – UK Markets
Reflecting last week’s BBA data, which revealed that new mortgage approvals for house purchases advanced to its highest level in nine months in June, the Bank of England’s monthly lending report on Monday showed that British lenders approved 65,619 mortgages in June, up from May’s 64,684 and broadly in line with the market estimate of 65,500. Meanwhile, consumer credits eased slightly to 1.567 billion pounds from 1.575 billion pounds. Nonetheless, these readings were strong enough to confirm the BoE’s view of the economic slowdown seen in early 2018 being temporary and heightened the expectations of a 25 bps rate hike on Thursday to help the sterling gather strength against the dollar and the euro.
On the other hand, the latest headlines on Brexit suggest that British Prime Minister Theresa May could be forced to have another battle against the Labour party in case of a hard Brexit. “Theresa May has warned senior Tories that the Labour party could use an ancient parliamentary procedure to stop Britain leaving the EU without a deal if MPs vote against her Brexit compromise this autumn,” Financial Times reported and quoted a minister saying that they had been warned about the possibility of Labour trying to use the ‘humble address’ as a tool to prevent them from leaving without a deal.
US Dollar – US Markets
According to the National Association of Realtors, the Pending Home Sales Index rose 0.9% on a monthly basis to 106.9 in June from 105.9 in May. Commenting on the data, “the positive forces of faster economic growth and steady hiring are being met by the negative forces of higher home prices and mortgage rates,” Lawrence Yun, NAR chief economist, said. “Home price growth remains swift, and listings are still going under contract at a robust pace in most of the country, which indicates that even with rising inventory in many markets, demand still significantly outpaces what’s available for sale.”
On Monday, the Federal Reserve Bank of Dallas published the results of its latest Texas Manufacturing Outlook Survey, which showed that the general business activity index slipped four points to 32.3 compared to analysts’ expectation of 31.
The US Dollar Index, which tracks the greenback against a basket of six major currencies, ignored the data from the U.S. and closed the day with small losses slightly below the 94.50 to point to a lack of market interest ahead of Wednesday’s FOMC event.
Euro – European Markets
The shared currency recorded modest gains against the buck on Monday while weakening vs. the pound. The European Commission’s closely-watched publication titled ‘Business and Consumer Survey Results’ showed that the Economic Sentiment Indicator (ESI) remained relatively stable in the euro area (-0.2 points to 112.1) and the EU (+0.1 points to 112.3) with the rise in services confidence offsetting the sharp fall witnessed in industry confidence. “The marginally better outcome of the headline indicator for the EU (+0.1) was mainly due to the marked improvement of sentiment in the largest non-euro area EU economy, the UK (+1.6),” the EC said, giving an additional boost to the pound.
Later in the day, Destatis announced that the annual CPI in Germany, in the first estimate, ticked down to 2% in June from 2.1% in May to suggest a possible slowdown in the inflation growth of the euro area’s biggest economy.
What’s coming up?
UK: On Tuesday, Nationwide is going to publish its monthly House Price Index.
US: Core Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred measure of inflation, will be released by the US Bureau of Economic Analysis. An annual reading of 2% or higher could ramp up the odds of two more rate hikes this year and help the dollar gather strength against its rivals. Personal spending and personal income numbers will also be included in the report. Moreover, Chicago PMI and S&P/Case-Shiller House Price Index will be other data to watch from the U.S.
EU: Retail sales and unemployment rate from Germany will be featured on Tuesday ahead of the eurozone’s preliminary Q2 GDP growth, unemployment rate, and the annual core-CPI, which is expected to rise to 1% in July from 0.9%.