There was no real catalyst for this morning’s sell-off, with investors instead dumping the Pound following a dire week of UK economic data and concerns that the Bank of England could join the Federal Reserve in cutting interest rates in the second half of the year. Yesterday’s soft services index ensured that this week’s PMI prints all came in much worse-than-expected, while suggesting that the UK economy barely grew in the second quarter of the year.
Even prior to this week, investors had already begun ramping up expectations for Bank of England interest rate cuts, particularly given that the Brexit impasse has shown no signs of ending any time soon. These expectations have heightened in the past few days following some dovish comments from BoE Governor Mark Carney earlier in the week.
Financial markets are now placing around a 50% chance of a cut before the end of the year. While we think that this is a slight overreaction, the current backdrop of growing calls for BoE rate cuts and increasing bets in favour of a ‘no deal’ Brexit come the end of October are far from providing a conducive environment for Sterling strength.
Euro heads for worst week in 3 ahead of payrolls report
Elsewhere, the Euro edged modestly lower again this morning, putting it on course for its worse weekly drop in three weeks ahead of this afternoon’s US labour report.
The common currency has been firmly on the back foot in the past couple of weeks as European yields extend their move downwards. The German 10-year government bond yield has dropped particularly sharply since Mario Draghi’s dovish speech in mid-June and is now at an all-time low of -0.4%. This far from provides an attractive proposition for foreign investors.
As we mentioned yesterday, this afternoon’s payrolls report presents itself as a particularly significant event risk for the currency market. Last month’s payrolls report was uncharacteristically poor, so the bar for a rebound this month is pretty low. That being said, even a pretty big upside surprise would, in our view, be insufficient to prevent the Fed cutting rates later this may, although may be enough to quieten calls for an aggressive pace of policy easing during the rest of 2019.
Today’s payrolls report will be released at 13:30 UK time.
Written by Matthew Ryan