Sterling Weakens as BoE's Carney Voices Concerns over Outlook
What’s been happening?
Pound Sterling – UK Markets
The British pound weakened against both the dollar and the euro on Tuesday pressured by, yet another, disappointing PMI data release from the UK and some cautious remarks from Bank of England Governor Mark Carney.
The IHS Markit/CIPS in its monthly report revealed that the business activity in the UK’s construction sector contracted at a much faster pace than expected in June with the Construction PMI plummeting to 43.1 from 48.6 in May and missing the market expectation of 49.3 by a wide margin. “A lack of clarity from policymakers has amplified the poor performance in June. Swift decision-making and a break in the political impasse hold the key to pulling the construction sector out of the quicksand," said Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply.
Later in the day, regarding the impact of the uncertainty surrounding the global trade conflict and the Brexit outcome, “Monetary policy must address the consequences of such uncertainty for the behaviour of businesses, households and financial markets,” Carney said in a prepared speech on Tuesday and sent the 10-year UK government yield and the currency lower. "In some jurisdictions, the impact of uncertainty may warrant a near-term policy response as insurance to maintain the expansion," Trump added.
US Dollar – US Markets
The US Dollar Index struggled to build on Monday’s gains as the falling Treasury bond yields weighed on the greenback. The only data from the U.S. showed that the ISM-NY’s Business Conditions Index improved slightly to 50 in June from 48.6 in May but couldn’t help the greenback. Meanwhile, the 10-year T-bond yield lost nearly 3% and dropped below the critical 2% mark on Tuesday.
Meanwhile, while speaking at a conference in London, Cleveland Federal Reserve Bank President Loretta Mester argued against a rate cut in the near term. “Cutting rates now could reinforce negative sentiment and encourage financial imbalances,” Mester said. "Some argue the Fed should lower rates to push up inflation expectations, but it is not clear how effective this would be." Nevertheless, the CME Group FedWatch Tool shows that markets are still pricing a 74.4% probability of a 25 bps rate cut in July compared to 80.1% on Monday.
Euro – European Markets
The shared currency posted modest gains vs the pound sterling and the dollar on Tuesday. The Eurostat reported that the Producer Price Index in May declined by 0.1% on a monthly basis to bring the annual rate down to 1.6% from 2.6%. Other data from the euro area revealed that retail sales in Germany contracted by 0.6% in May.
Later in the day, in a surprise announcement, European Council President Donald Tusk said that the IMF director Christine Lagarde was nominated to be the new president of the European Central Bank. However, the fact that no one really knows if Lagarde is a hawk or a dove caused the market reaction to this development to stay muted. "Absolutely sure Lagarde would be an independent president of the ECB,” Tusk stated.
What’s coming up?
UK: The IHS Markit will release the Services PMI report on Wednesday. Later in the day, Bank of England (BOE) Deputy Governor Ben Broadbent will be delivering a speech.
US: Weekly jobless claims, trade balance, and the ADP private sector employment change from the U.S. will be featured in the U.S. economic docket ahead of Thursday’s July 4th holiday.
EU: The IHS Markit will publish the Services and Composite PMI data for Germany, France, Italy, and the eurozone on Wednesday.