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Sterling holds near $1.27 as UK plans re-opening, short positions increase

Sterling rose against the dollar on Monday, as plans to ease coronavirus lockdowns in the UK and signs the economy may bounce back due to pent-up demand kept the currency just below the $1.27 touched late last week.

Analysts warned, however, that Brexit remains a risk for the pound – which has rallied for seven consecutive days against the dollar – as talks with the European Union fail to make progress.

The pound has risen 2.8% against the dollar this month as several economies re-open from lockdowns, weakening demand for the U.S. currency.

British Prime Minister Boris Johnson is planning to relax rules on outdoor dining and weddings, as well as speeding up government investment plans to limit the economic damage from the coronavirus, newspapers reported on Saturday.

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The Sunday Times said Johnson wanted to relax planning restrictions that stop many pubs, cafes and restaurants from using outside areas, and also to make it legal to hold weddings outside.

The number of British shoppers in early June indicate pent-up demand for shopping in physical stores as the coronavirus lockdown is eased, industry data showed on Monday.

Britain went into lockdown on March 23 to slow the spread of the pandemic, with all retail stores deemed non-essential forced to close.

By 0828 GMT, sterling was up 0.15% against the dollar at $1.2686, just below Friday’s $1.27. It was weaker against the euro by 0.12% at 89.10 pence.

“Sterling-dollar remains anchored around the 200-day moving average of $1.2660/65. But it seems that bar the broader weak dollar and positive risk environment, investors currently lack any major catalyst for the pound to move materially above this key level,” said Viraj Patel, FX and global macro strategist at Arkera.

“We could see the pound tread water around these levels in absence of any further positive catalysts and investors take stock of what will happen next in broader markets – especially ahead of the Fed meeting later this week. However, with Brexit headwinds also coming to the forefront of investors – the risks are mildly tilted to the downside for the pound this week.”

Johnson is willing to accept European Union tariffs on some UK goods in an attempt to win a trade deal and break the deadlock in talks with the EU, the Daily Mail reported. Britain’s chief negotiator, David Frost, had made a new offer, the newspaper said, citing sources.

According to the offer, the UK would accept tariffs on a small number of goods in return for the EU’s dropping its demand that Britain continue to follow EU rules.

Speculators increased their net short position on sterling in the week to last Tuesday, CFTC data showed on Friday.

Reporting by Ritvik Carvalho

Source: UK Reuters

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Sterling takes another big tumble as investors seek safety

The British pound fell sharply again on Monday as investors dumped currencies they consider riskier to own amid the coronavirus pandemic.

Sterling has been under pressure because of a massive wave of selling of most currencies other than the dollar, which is the world’s most liquid currency and the safe haven of choice when confidence evaporates from financial markets.

The pound has also been hit by investor concerns that Britain’s approach to dealing with the virus, which has seen a more staggered disruption to economic and everyday life than in other countries, is not the right one.

Britain’s large current account deficit has also made sterling vulnerable, while drastically poorer liquidity has exacerbated moves downwards.

Sterling fell as much as 1.6% to $1.1490 by 1550 GMT before recovering slightly.

Last week the British currency briefly touched a 35-year low of $1.1413.

Against the euro, sterling tanked by an even greater margin.

The euro added 2% to 93.61 pence, still some way off last week’s lows of 95 pence.

Some analysts have been impressed by the British policy response to the crisis, but say sterling has not benefited. The Bank of England has slashed interest rates to record lows, ramped up its quantitative easing programme and the government announced significant fiscal stimulus.

“The broken financial environment means that GBP is not able to respond to the proactive fiscal support undertaken by UK policy makers,” ING analysts said in a research note.

Kit Juckes, an analyst at Societe Generale, noted that according to positioning data, as of last Tuesday there had only been a small reduction in the long positions on the pound.

That would make the currency vulnerable to further falls as investors cut their long positions.

“Has the slide since Tuesday cleared the longs? It seems doubtful,” he said.

Currency markets were highly volatile again, with the dollar falling after the U.S. Federal Reserve announced an unprecedented scheme of credit support to help the United States economy.

The greenback later recovered some of those losses as stock markets resumed their fall and investors sought safer places to put their cash.

British flash Purchasing Managers Index survey data for March published earlier on Monday unsurprisingly fell into contraction, with the coronavirus expected to damage the economy further in the weeks ahead.

Reporting by Tommy Reggiori Wilkes

Source: UK Reuters

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Coronavirus: Sterling plunges as investors flock to dollar safe haven

Sterling has plunged to its lowest level against the US dollar (GBP/USD) since October last year on the back of global coronavirus-related uncertainty.

The pound crashed as low as 2.36 per cent against the dollar today to fall to just $1.2517, as traders flocked to the greenback.

By 5.35pm it stood 1.63 per cent down at $1.261.

The sterling sell-off came on another punishing day for UK stocks, with the FTSE 100 index suffering its worst one-day plunge since 1987 to book a 10.9 per cent drop.

US President Donald Trump’s decision to ban all travel from Europe to the US, except from non-Schengen zone countries like the UK and Ireland, spooked traders.

Analysts explained a huge global sell-off of volatile assets in reaction to the ban has driven up the dollar’s value.

Tajinder Dhillon, senior research analyst at Refinitiv,said: “Covid-19 and a collapse in oil prices have caused a plunge in risk assets. The S&P 500 has entered into a bear market, falling over 20 per cent from its February peak. This has led to a flight to safety including bonds, gold, and Japanese Yen.”

And Ranko Berich, head of market analysis at Monex Europe, added: “We are seeing multiple markets across the globe with extremely unusual amounts of volatility.

“The main takeaway right now is markets are convulsing with extreme amounts of fear and risk aversion. Today that has manifested as a massive bid for US dollars.”

“It is cash pouring into the dollar that pushed sterling to current levels. We see the same across all currencies,” added Ipek Ozkardeskaya, senior analyst at Swissquote Bank.

“Investors may be piling into cheap US dollars with cash liberated from European indices sales.”

Trump travel ban sinks sterling and euro

Trump defended the measure today as a move to defend the US from a rise in coronavirus cases. But observers warned of the impact on global trade.

The travel ban prompted traders to send the FTSE 100 into coronavirus freefall as they quit UK stocks in their droves.

“The travel ban is a decisive step to prevent the spread in the US but will cripple trade between the two continents,” London Capital Group’s Jasper Lawler said. “Goods will still flow but presumably at reduced pace and trade in services will almost grind to a halt.”

Investors piled into safe haven assets like US Treasury yields, which traders buy in dollars, pushing up the value of the greenback. The dollar is increasingly seen as a safe haven asset, in part due to its dominant use in global payments.

The euro also fell 0.61 per cent against the dollar to $1.119 after the European Central Bank (ECB) failed to restore market confidence with stimulus measures this afternoon.

But sterling tumbled against the euro too, sinking 1.05 per cent to $1.1268 by 5.35pm.

“The dollar has been left as the last haven standing,” Berich said.

He added the massive sell-off has driven demand for liquidity, which has boosted the greenback.

“We are seeing a lot of reports of a lack of liquidity in the US. There’s companies looking for liquidity and banks are attempting to provide cash to offer that liquidity. That has created a shortage of physical cash so the price of the dollar has gone up,” Berich explained.

Global stocks crash in market rout

Global stocks sank deep into the red today in an almost unprecedented day of market turmoil.

The FTSE 100 crashed 10.1 per cent to just 5,282.4 points and Europe’s Stoxx 600 crashed 11.1 per cent.

Similar sell-offs were seen in the US as the New York Stock Exchange halted trading after the S&P, Dow Jones and Nasdaq all fell by more than seven per cent within minutes of the market opening.

The sharp drop in US stocks triggered circuit breakers, which halt trading on the markets for 15 minutes.

It is the second time this week the automatic system has been activated to curb panic selling.

That did not calm traders, however, with the S&P 500 down 8.8 per cent, Dow down 9.2 per cent and Nasdaq down 8.4 per cent by 4.15pm.

Markets in ‘panic mode’

Bond yields have continued to decline in the US and the UK, indicating people are flocking to less risky investments.

Forex trading platform Equals’s chief economist, Jeremy Thomson-Cook, said global markets are in “panic mode”.

He said: “At the moment, investors are looking to financial institutions and governments to stand up and commit something to fighting this downturn. The ECB has had to call out governments to open their wallet and last night’s address from the White House was met with disbelief as to its lack of a plan beyond flight bans. The time for action is now or we are going to be talking about credit crunches again.

“Sterling is caught in the middle; a currency that has lost its haven status courtesy of Brexit while investors hold dollars as the global reserve currency.”

By Stefan Boscia

Source: City AM

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Sterling falls to over five-week low vs euro on hard line in EU talks

The pound fell on Thursday, hitting a more than five-week low versus the euro, as Britain confirmed a hardline stance on trade talks with the EU and disappointment grew that the new finance minister may not increase spending as much as expected.

Britain said on Thursday it wanted binding obligations on access to the European Union’s financial market. London, Europe’s biggest financial centre, risks being locked out of its biggest market for services such as banking, insurance and asset management if it loses access to the EU in January.

But senior minister Michael Gove told parliament on Thursday the UK would not “trade away its sovereignty” in pursuit of a trade deal with the EU.

The pound slipped 0.2% to a one-week low of $1.2860 and held near this level in late trade GBP=D3.

Against a broadly firm euro, sterling fell more than 1% to 85.43 pence, its lowest level in more than a month EURGBP=D3.

The pound also fell against the safe-haven Japanese yen to a two-month low of 141.50 GBPJPY=D3.

“The pound has reversed early gains as the government firmly places the prospect of no-deal back on the table in order to strong-arm the EU’s dynamic alignment to bend to their will,” said Simon Harvey, a forex analyst at broker Monex Europe.

“The resumption of trade uncertainty comes just as business optimism starts to improve, suggesting the Brexit headwind to the economy may not have abated quite just yet and hence the need for heightened fiscal stimulus,” Harvey said.

But the new fiance minister, Rishi Sunak, has been told by Treasury officials he cannot simultaneously raise public spending as fast as Prime Minister Boris Johnson wants, keep taxes down and adhere to new Treasury rules that allow borrowing only for capital investment, the Financial Times reported.

Consequently, Sunak could postpone loosening fiscal policy, which has put pressure on the pound. The possibility of more spending was the main reason the pound strengthened in recent weeks, despite concern that Britain may not agree a trade deal with the EU by the end of this year.

Market gauges for implied volatility in sterling in all tenures from one-month to one-year options contracts all rose close to their highest levels this year.

Money markets have started to price in a higher chance the Bank of England will cut interest rates to boost the economy if data worsen and Sunak does not stimulate growth through higher fiscal spending. A 25-basis-point cut to the current 0.75% rate is priced in by August this year.

“No big fiscal push means that if there’s a slump, the burden of reviving the economy will fall on monetary policy,” said Marshall Gittler, an analyst at broker BDSwiss Group.

Additional reporting by Dhara Ranasinghe; Editing by Alex Richardson

Source: UK Reuters

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Sterling rebounds on business surveys, weaker dollar

Sterling rebounded on Monday as investors who had sold the currency for safe havens after the United States killed Iran’s top military commander returned to the pound.

Analysts said an upward revision to a business survey supported the pound too while the focus for investors now shifts to a parliamentary debate on Brexit legislation on Tuesday.

“We’ve got some better than expected PMIs, but some of it (the move higher in sterling) has been sentiment-driven,” said Morten Lund, an analyst at Nordea. “It’s a bit surprising, but I think some of it is positioning.”

The Purchasing Managers Index survey for Britain’s services for December came in with a final reading of 50, better than the 49.1 reading forecast by economists polled by Reuters.

Optimism among companies has improved markedly since the Dec. 12 election, although the economy continues to stagnate, the PMI survey showed.

Investors have remained cautious about the pound since Prime Minister Boris Johnson’s Conservatives won a big majority in the vote. They worry about more political uncertainty down the road with Britain set to leave the European Union on Jan. 31 and the two sides then beginning negotiations on their future trading relationship.

RBC Capital Markets currency strategist Adam Cole noted that provisional January PMIs on Jan. 24 “will be more interesting as they will shed some light on the potential for a rebound in activity early in 2020 as political uncertainty cleared following the election.”

The UK parliament returns on Tuesday and will debate the Brexit bill, which includes a clause ruling out any extension of the transition period for trade talks beyond December 2020.

The pound rose 0.7% to as high as $1.3173 on Monday but remains below last week’s $1.32.

Sterling fell on Friday after the killing of Iranian general Qassem Soleimani in a U.S. drone strike at Baghdad airport, boosting demand for safe-haven currencies, including the dollar.

The pound gained 0.4% to 85 pence before settling at 85.105 pence. It remains some way off its more than three-year high of 82.78 pence per euro reached last month.

Some analysts think sterling is in for a drop.

Danske Bank analysts see the pound falling to around 87 pence per euro in three months because the Bank of England will soon cut interest rates by 25 basis points due to economic weakness.

“Our base case is that this happens in January, but since the BoE has hinted it may want a bit more post-election data to rely on, the cut may not come before the May meeting,” the analysts said in a note. They said investors were not pricing in more than a 50% probability of a cut by the end of 2020.

Reporting by Tommy Reggiori Wilkes

Source: UK Reuters

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GBP to EUR Forecast: Boris to Prohibit Brexit Extension

The sterling vs euro interbank exchange rate stands at 1.1715 today. This is close to its lowest in over two weeks, or since December 3rd.

The pound stands near this fortnight low versus the common currency, first because UK Prime Minister (PM) Boris Johnson will today introduce his legislation, to “legally prohibit” the UK’s future EU trade deal talks going beyond the end of 2020.

The PM will add this clause, as part of the Withdrawal Agreement Bill (WAB), Parliament’s legal name for the Brexit agreement that PM Johnson agreed with former European Commission (EC) President Jean-Claude Juncker, in October.

Following last week’s UK election, PM Johnson enjoys an 80-seat majority in the House of Commons, so it’s thought that the amendment will smoothly pass.

However, for investors, this risks the possibility that the UK might “crash out” of Europe by December 31st 2020, without new trade arrangements, thereby weakening sterling.

UK Retail Sales Fall in November as BoE Holds Rates at 0.75%

UK retail sales fell by -0.6% in November, said the Office for National Statistics (ONS) on Thursday, below forecasts for a 0.3% rise.
The Bank of England held UK interest rates at 0.75%, as predicted, yet maintained open the possibility of a cut next year, if UK economic growth and inflation don’t pick up.

This morning, we’ll learn the UK’s revised GDP (Gross Domestic Product) growth figures for Q3, from July to September, which is forecast to remain at 0.3%.

This is the last major UK economic release of 2019. If the data surprises above or below this figure, it could affect the pound.

Eurozone Consumer Confidence Data Due as Lagarde May Surprise in 2020

Today the euro bloc’s consumer confidence figures for December are released by the EC at 15.00 GMT, and forecast at -7.0, from November’s -7.2.
However, this is a relatively minor release, so looks unlikely to earn the financial markets’ attention, unless the results arrive significant above or below forecasts.

This is the Eurozone’s last economic release of 2019, although turning to 2020, we’ll see what steps new European Central Bank (ECB) President Christine Lagarde takes, to prop up the bloc’s economic growth and inflation. If Ms. Lagarde surprises next year, this might impact the euro.

By James Lovick

Source: Pound Sterling Forecast

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Sterling falls against the dollar as UK economy slows but US picks up

The pound has fallen against the dollar as traders near the end of their week after survey data was better than expected in the US but painted a gloomy picture of the UK economy.

Sterling was trading 0.59 per cent lower against the greenback by 4.40pm, taking it to $1.283.

A falling pound alongside positive noises from China concerning a US trade deal helped the FTSE 100 end the day 1.22 per cent higher.

Traders sold off sterling following a worse-than-expected survey reading which showed that the UK private sector has suffered its biggest fall in output in over three years in November.

By contrast, US factory and services activity picked up pace this month, a survey from data firm IHS Markit showed.

The reading, which was better than analysts had hoped for, boosted the dollar. Against the euro, for instance, the dollar has risen 0.25 per cent to €0.906 by 4.40pm UK time.

Connor Campbell of trading platform Spreadex called the UK figures “nasty, nasty numbers”. He said they were “so bad that sterling was swiftly booted into the red”.

Andy Scott, associate director at risk assessor JCRA, said: “Sterling reacted negatively to today’s data which points to economic activity declining in November.”

He added that the reading supports the case made by the two Bank of England rate-setters who voted for a rate cut last month.

“The economy is clearly reflecting the strain placed on businesses from Brexit negotiations and the continuing state of flux,” he said, “added to which is a general election that includes one major party pushing for a relatively hard Brexit and radical socialist policy proposals from the other.”

Scott said the outlook for sterling “very much hangs on the outcome of the election, with the currency reacting positive to a number of voting intention polls that give the Conservatives a double-digit lead over the Labour party”.

A Tory majority is seen by most traders as a positive outcome for the pound as it increases the chances of Britain leaving the EU with a Brexit deal, which they hope would end some of the recent economic uncertainty.

By Harry Robertson

Source: City AM

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Sterling revisits two-year lows as UK economy shrinks

Sterling skidded again on Friday, hitting its lowest in more than two years, after an unexpected second quarter contraction in the economy alarmed investors already fretting that Britain is headed for a no-deal Brexit.

The pound, which has lost 3.7% of its value against the dollar since arch-Brexiteer Prime Minister Boris Johnson’s arrival in office in late July, sank to $1.2056, the weakest it has been since January 2017, and was last down by 0.5% at $1.2072.

GRAPHIC: Sterling at new 31-month low – tmsnrt.rs/2MS7lSb

Against the euro, the pound slid to a new two-year low of 92.885 pence and was last down by 0.7% on the day.

The British currency has been close to being the worst performing in the developed world these past couple of weeks since Johnson became prime minister on July 24.

Britain’s economy shrank at a quarterly rate of 0.2%, the first contraction since 2012 and below all forecasts in a Reuters poll.

Year-on-year economic growth slid to 1.2% from 1.8% in the first quarter, Britain’s Office for National Statistics said, its weakest showing since the start of 2018.

British government bond yields fell as investors sought safety in fixed income assets.

UK domestic stocks weakened, although London’s export-heavy blue chip FTSE 100 index clawed its way back into positive territory as sterling plunged.

Some investors now expect Britain to enter a technical recession, which represents two consecutive quarters of negative growth, if the economic situation continues to worsen.

“Overall, these are clearly a disappointing set of figures which have significantly raised the likelihood of a technical recession,” said Azad Zangana, senior European economist and strategist at Schroders.

The pound has suffered a torrid few weeks as investors priced in the growing risk of Britain exiting the European Union under Johnson on Oct. 31 without a deal to smooth the transition.

BNP Paribas raised on Friday the probability of a no-deal Brexit to 50% from 40%. Some analysts say there could be more pain to come.

“As the political risk premium rose, sterling was the worst-performing major currency in each of May, June and July, but the negative risk premium can still rise further,” RBC Capital Markets analyst Adam Cole said.

Johnson is planning to hold a parliamentary election in the days after Brexit if lawmakers sink the government with a no-confidence vote, British media have reported, further unnerving currency traders.

It is growing increasingly likely that Johnson will face a vote of no confidence soon after Sept. 3, when parliament returns from its summer recess, analysts say.

Johnson says Britain, which voted for Brexit in 2016 by a 52%-48% margin, must leave the EU on schedule on Oct. 31, with or without a divorce deal with the bloc. Delaying an election until after Brexit could be a tactic to ensure that happens even if parliament withdraws support for his government.

Vasileios Gkionakis, global head of forex strategy at Lombard Odier, said he was worried about an election, but was also ready to unload some sterling short positions he had accumulated since a lot of bad news had been already priced in.

“If no-deal (Brexit) increases in probability, then of course sterling would be a sell, but until then I’m becoming a bit more neutral,” Gkionakis said, adding that he expects sterling to “settle around $1.20” before market participants reassess their expectations of that outcome.

Others in the market mirrored Gkionakis’ views on Friday.

Paul Hollingsworth, senior European economist at BNP Paribas, said he was “reluctant to enter short sterling positions” and that he found “risk-reward more attractive to consider entering structural long sterling positions as we get closer to September”.

The shrinking economic growth in the second quarter did not make investors more confident that the Bank of England will cut interest rates in September. Some economists expect the central bank to embark on more easing soon, however.

“As uncertainty continues to loom over the UK economy, the difficult run of data is expected to continue and the BoE will need to consider its next step carefully as its global peers embark on further rate cuts,” said Geoffrey Yu, head of the UK Investment Office at UBS Wealth Management.

Money markets are pricing in a 25 basis point cut by January 2020.

Reporting by Olga Cotaga with; additional reporting by Tommy Wilkes; Editing by Mark Heinrich

Source: UK Reuters

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Pound Sterling will Struggle to Go Much Lower vs. Euro: Nomura

The British Pound is said to already be trading at crisis levels, and as a result it will struggle to fall much lower says an analyst at leading global investment bank.

GBP is already “trading at crisis levels, and will struggle to go much lower,” says Jordan Rochester, foreign exchange strategist with Nomura in London.

That the Pound is already low by historical standards, it would suggest it will take successive bouts of bad news to really push new lows.

We wonder where such news might come from.

The Pound has recovered ground against the Euro over the course of the past 24 hours with news that Boris Johnson would replace Theresa May as Prime Minister on Wednesday.

The Pound-to-Euro exchange rate has recovered to 1.1160, having been as low as 1.1047 just last week.

“The Pound was volatile yesterday following Boris Johnson’s victory speech, as well as remarks from the BoE’s Haldane and Saunders who indicated they are not likely to vote for a rate rise in the near term. The Euro is under pressure ahead of tomorrow’s ECB policy announcement. The ECB is expected to prepare the ground for lower interest rates in September, although there is an outside chance of a reduction as early as tomorrow,” says Hann-Ju Ho, an economist with Lloyds Bank.

We would like to say the Pound is rallying exclusively on news Johnson is taking over, but we expect the picture is a great deal more nuanced: markets have known for weeks Johnson was incoming, and we believe they are now awaiting the next decisive moves on Brexit policy for guidance.

Furthermore, markets will be watching to see whether a General Election is likely in the UK before pulling the trigger on further Sterling declines.

Nomura’s Rochester also makes the point that the change at the top of the UK’s leadership extends well beyond the Prime Minister’s office:

“Over the next few weeks and months, the leadership transition will not only include a new Prime Minister, but a complete changing of the guard. In addition to a new PM, the UK can also look forward to seeing replacements for Chancellor, Cabinet, Bank of England Governor, budget and Brexit plan.

Despite the expected leadership changes, Rochester notes implied volatility levels in Sterling are still below levels seen back in March when markets were showing notable nerves over the prospect of potential big moves around the original Brexit date, and therefore “a lot of the negative news has been priced into spot,” says Rochester.

In short, the Pound is at levels that suggests it has eaten a decent share of bad news.

“GBP already trades at crisis levels and typically struggles to move much lower,” says Rochester. ‘While we acknowledge that a no-deal Brexit is a risk and would very likely record new lows in GBP, we do not expect the market to assign a higher hard Brexit premium than previously or until parliament returns after the summer break in September.”

Pound struggles to get much lower than this

Above: GBP/EUR since 2009: Sterling is at already-low levels, and it might struggle to fall lower

We believe the conditions for a recovery in Sterling over coming weeks, that coincides with Parliament’s summer break, is a distinct likelihood.

After all, this is a political currency, and with no politicians to bother it the prospect of a recovery grows.

Euro Hit by Dire Manufacturing Data

The Euro was in retreat from a steady Dollar and stronger Pound Sterling Wednesday after IHS Markit surveys for July pointed to a renewed economic slowdown in the Eurozone in the third-quarter, prompting calls for the European Central Bank (ECB) to support the economy with interest rate cuts and more quantitative easing as soon as this Thursday. 

The IHS manufacturing PMI fell to a 79-month low of 46.4 in July, from 47.6 in June, when financial markets had looked for it to remain unchanged.

However it was German manufacturing PMI which proved an eye-opener: the German Manufacturing PMI read at 43.1, well below expectations for 45.1.

Anything below 50 suggests contraction, it is therefore little wonder that Euro exchange rates are in retreat on the numbers:

The Pound-to-Euro exchange rate extended its short-term uptrend on the numbers to record a near-month high at 1.1207.

The Euro-to-Dollar exchange rate fell to close in on a new two-month low at 1.1139.

Meanwhile, the Eurozone services sector PMI fell from 53.6 to 53.3, in line with the market consensus.

The composite PMI, which combines the two previous surveys, fell from 52.2 to 51.5 this month suggesting that while the economy is still expanding it is close to stalling. 

New order flows stagnated in the manufacturing sector this month and confidence hit its lowest level since late 2014, leading companies to become more cautious about hiring new employees, IHS Markit says.

Exports were the weakest link again and many companies were forced to begin clearing old work backlogs to sustain output. “The key point here really is that the slowdown in manufacturing is now so severe that it almost surely will hit the official labour market data soon, which could change the political story, re fiscal policy, too. The chart shows that GDP growth rebounded at the start of the year, but incoming data suggest that the party ended abruptly in Q2, and the PMI now suggests a further slowdown in Q3, though it has an opportunity to recover in coming months,” says Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics.

Written by Gary Howes

Source: Pound Sterling Live

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Sterling drops again as markets raise bets on no-deal Brexit

Sterling extended its decline on Monday as the outlook for the currency turned bleaker, with traders increasing their bets on a no-deal Brexit ahead of the results of the Conservative Party’s leadership election.

The pound’s weakness was in contrast to the general calm in broader currency markets, and signalled growing unease among investors over the likelihood of eurosceptic former foreign minister Boris Johnson becoming the next prime minister.

The result of the weeks-long internal party election will be announced on Tuesday, with Johnson widely expected to have beaten foreign minister Jeremy Hunt. The winner will become prime minister on Wednesday.

The pound last traded down 0.2% at $1.2476, not far from the 27-month low reached last week, having declined 1.7% against the dollar so far this month.

Against the euro, it fell to 89.98 pence.

Some investors are worried Johnson could pull Britain out of the European Union on Oct. 31 without a trade deal in place in order to appease members of his Conservative Party and frustrated pro-Brexit voters, three years after Britons voted by a narrow majority in a referendum to leave the EU.

“To save the Conservative Party, he (Johsnon) has to deliver Brexit on Oct. 31,” said Helen Thomas, CEO of macroeconomic consulting firm BlondeMoney.

Market participants have been buying more options since early May to protect against losses in sterling and have consolidated their positions in the past few days, according to three-month sterling risk-reversals, which measure demand for buy and sell options on the British currency.

Three-month implied volatility in the pound has risen since the beginning of the month and has hit its highest level since early April, signalling that traders are bracing for a rocky ride for sterling.

Still, levels are well below the highs achieved before Britain’s initial March 29 deadline to leave the EU, which was extended after Prime Minister Theresa May failed to pass a withdrawal deal in parliament.

(For a graphic on ‘Implied sterling volatility surges around Oct 31 deadline’, click here tmsnrt.rs/2O9MJHo)

Hedge funds have also increased their short positions on the pound to $5.94 billion via currency futures in the week to July 16, a 10-month high, based on Commodity Futures Trading Commission data.

“The market will look to price in the chance of a no-deal Brexit at 50/50,” said Neil Jones, head of European hedge fund sales at Mizuho.

Morgan Stanley said it now saw a 30% chance of Britain leaving the EU without a deal compared to 25% previously.

Though investors look anxious, BlondeMoney’s Thomas argued they aren’t worried enough.

“The risk (of a no-deal Brexit) is really, really underpriced now,” she said, adding that she expected to see sterling fall to parity against the euro in the event of Britain crashing out of the bloc without a deal.

Voting by Conservative Party members in the leadership election ends at 1600 GMT on Monday. The announcement of the winner is expected around mid-morning on Tuesday.

Some analysts expect the pound to hover around its current levels, at least for now, given that the UK parliament will enter summer recess shortly and therefore won’t make any new progress on Brexit negotiations.

“Sterling already trades at crisis levels and typically struggles to go much lower,” said Jordan Rochester, forex strategist at Nomura.

In a note to clients, Citi analysts said that a no-deal Brexit would likely prompt the Bank of England to cut interest rates, which “could help offset the negative economic effects of ‘crash out’ and support the currency.”

Reporting by Olga Cotaga; Editing by Gareth Jones

Source: UK Reuters