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Brexit Sapping Confidence

GBP

UK construction PMI data recovered slightly to 45.3 in July, up on last month but also the third reading below 50.0 on the bounce and business confidence dipped to lows since late 2012. Brexit uncertainty sapped confidence and contract decisions were beset by hesitation. Following a spate of weak UK data sentiment remained weak and Bank of England Governor Mark Carney warned that the economy would face a sudden dip in the event of a ‘no-deal’ Brexit. 

Futures market data revealed Sterling short, non-commercial positions (bets against the Pound) had risen to just over 90,000 contracts in the last week, a high since April 2017. The possibility of a short squeeze (sudden rise in GBP as traders reverse bets) remains, but this depends on significant, positive UK developments. Over the weekend the political manoeuvring continued with “remainer MPs” attempting to bolster their position. Prime Minister Boris Johnson’s special adviser Dominic Cummings stated that Brexit could not be stopped. The Euro pushed to near 1.0890 and Dollar weakness allowed Sterling to remain above 1.2100. Today’s sole UK economic data is Markit Services for July and the forecast is for slight growth, in line with last month.

USD

US non-farm payrolls increased 164,000 for July which was in line with market expectations while the June increase was revised down to 193,000 from the 224,000 reported previously. The unemployment rate held at 3.7%, also in line with consensus forecasts, although there was a strong reported employment increase according to the household survey. Average hourly wages increased 0.3% for the month compared with expectations of 0.2% with the annual increase at 3.2% from 3.1%. 

The data overall continued to suggest a firm labour market and slightly dampen expectations of a further near-term interest rate cut. However, the data was overshadowed by trade fears following President Trump’s Thursday announcement that tariffs would be imposed from September on the remaining $300bn of Chinese exports. 

There was a shift in Federal Reserve (Fed) Funds futures expectations with markets now fully pricing in a further cut in interest rates at the September policy meeting. In this environment, the dollar was unable to sustain gains with the Euro edging back above the 1.1100 area. Expectations of further aggressive Trump rhetoric and renewed damage to US manufacturing unsettled the dollar to some extent with the Euro around 1.1125 as the single currency gained an element of defensive support.

EUR

The Euro generally looks positive as we start the new trading week, albeit trading slightly lower this morning against the Dollar. The pair is currently trading at 1.1120.

The uptick is associated with the market sentiment that the US Federal Reserve may deliver additional rate cuts before the end of the year if the US-China trade tensions does not subside. The Fed cut rates by 25 basis points last week but surprisingly refrained from signaling further easing. 

Pretty slim on the news front this week, with not many major releases being announced. Today we have Eurozone Markit PMI data and Sentix Investor Confidence out this morning.

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