England face Sweden in the World Cup quarter final on Saturday, but it’s not only on the football pitch where things may be getting hot hot hot!
The UK June PMI surveys all surprised on the upside this week relative to market expectations (close to our forecasts), while BoE Governor Carney sounded more upbeat about the economy in a speech in Newcastle. Markets now attach around 80% probability of an August rate rise (our view). Sweden’s Riksbank, meanwhile, left rates on hold at -0.5%, but two of the six rate-setters favoured a near-term rise
In the markets, GBPUSD reached a high of 1.3275, aided by Governor Carney’s comments. However, uncertainties about the future trading relationship with the EU capped gains. UK 2-year gilt yields peaked at 0.765%, although 10-year yields were slightly lower on the week at 1.25%. There was broad US dollar weakness, reinforced by an unexpected rise in the US unemployment rate to 4.0% in June, while wage growth stayed at 2.7%. EURUSD rose above 1.1750, a three-week high, supported by strong German May industrial production figures (2.6%m/m) and reports that some ECB policymakers are in favour of an earlier first rate rise than end-2019. There was also speculation that the ECB may reinvest maturing paper from its QE programme into longer-dated bonds (so-called ‘operation twist’).
At the time of writing, UK PM May is hosting the Cabinet at Chequers, where an agreement on a new post-Brexit trading arrangement is being sought. It remains to be seen, though, whether it will have the backing of the Cabinet or the EU. A White Paper is expected to be published next week.
See you next week!
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