Bank of England’s Carney hints at summer stimulus after Brexit vote
01/Jul/2016 • Currency Updates•
Sterling crashed back towards its 30 year low on Thursday after Governor of the Bank of England Mark Carney warned that the central bank would probably need to pump more economic stimulus into Britain’s economy in the next few months following last week’s Brexit vote.
Speaking in London, Carney warned that the economic outlook in the UK had deteriorated following the shock announcement that Britain had voted in favour of leaving the European Union. The Bank will now make an initial assessment of the situation at its meeting later this month, followed by a full assessment at the quarterly inflation report in August.
This comes amid growing concerns that Britain’s vote to leave could cause a severe economic downturn in the UK in the short term. Many analysts have already downgraded their growth forecasts for this year. Carney had recently warned that a Brexit could tip the UK economy into a recession.
This dovish rhetoric from the Bank of England comes as no real surprise to us and reinforces our view that the Bank of England is likely to announce at least a 25 basis point cut in its already record low benchmark rate at their next meeting on 14 July. We also see a good chance they’ll announce an increase in the existing £375 billion quantitative easing programme.
More unexpectedly, the European Central Bank also sent the Euro sharply lower yesterday afternoon after reportedly announcing that it would be expanding the pool of assets to be purchased in its existing QE programme.
These two rather significant central bank announcements so close to each other amount, in our view, to coordinated easing and support our view that the US Dollar will rally significantly against almost every European currency this year.
Major currencies in detail:
Following Carney’s very dovish comments the Pound fell 1.3% against the US Dollar and 1% versus the single currency.
The reaction following the news that staunch Brexit supporter and former London Mayor Boris Johnson was pulling out of the race to become Britain’s next Prime Minister was short lived, with markets paying much more attention to Carney’s comments. Theresa May is now the favourite and it appears she is in no rush to invoke Article 50.
Earlier in the day, GDP growth for the first quarter remained unrevised at 2%. The current account in the UK also remained around its record high, although decreased slightly to £32.6 billion.
We expect Monday’s 30 year low in GBP/USD to be tested in the coming days, particularly following yesterday’s comments from Carney, which have ramped up expectations that the Bank of England will cut interest rates this month.
Along with the Pound, the Euro declined against most of its major currencies on Thursday, ending 0.4% lower against the US Dollar.
A Bloomberg report yesterday led investors to think the ECB could loosen its quantitative easing rules. Although this was later denied, the thought of extra easing is now in the mind of the markets going forward and investors will look for dovish comments from ECB officials in the coming weeks.
In terms of economic data, German retail sales rose 0.9% in May, which was much stronger than expected, while German unemployment declined by 6K, leaving the jobless rate at 6.1%.
The latest manufacturing PMIs for June will be released this morning, although are unlikely to take on much importance given the surveys were conducted before last week’s Brexit. Unemployment is expected to slow again when released this morning.
The US Dollar rallied 0.4% against its major peers yesterday, buoyed by gains against the Euro, Yen and Sterling.
The US Dollar continued to gain from safe-haven flows on Thursday. The latest economic data was also better than expected. Initial jobless claims increased, albeit less than expected to 268,000, while the Chicago PMI increased to its strongest level since January 2015.
Manufacturing PMIs from Markit and ISM this afternoon will be the focus in the US today. Expectations for the next interest rate hike by the Fed will continue to dominate. The focus now turns to next week’s labour report, including the nonfarm payrolls figure.
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