The pound was the worst performing major currency in today’s European session as it tumbled after the Bank of England downgraded its growth and inflation forecasts. The euro was steady against the US dollar but surged against the pound, while the greenback came under pressure in forex markets from a weak ISM PMI.
The Bank of England decided to hold rates unchanged at 0.25% at the end of its two-day policy meeting today. But the 6-2 vote was less hawkish than the 5-3 split seen in June as newcomer Silvana Tenreyro joined the doves in voting against a hike. The Bank also published its quarterly inflation report where they revised down their forecasts of GDP growth and inflation for 2017 and 2018.
The pound fell over 100 pips against the dollar to plunge to $1.3118 from a fresh 10-month high of $1.3264 hit just a few hours prior to the Bank’s announcement. Sterling was earlier boosted by stronger-than-expected services PMI out of the UK. The Marki/CIPS services beat expectations of 53.6 to rise to 53.8 in July from 53.4 previously. However, the Bank’s less optimistic outlook and a less hawkish MPC vote weighed on the British currency with traders ignoring Governor Mark Carney’s warning in his press conference that it would be appropriate to ""withdraw more stimulus than the market currently has embedded". Most analysts now expect a rate hike to arrive in the second half of 2018.
The euro also surged against the pound, breaking above 0.90 pounds for the first time since November 2016. It last stood 0.8% firmer at 0.9031, while against the dollar, it was steadier, hovering around $1.1850 for much of the session.
The single currency found support today from better-than-expected retail sales data for the Eurozone. Retail sales in the euro area jumped by 0.5% month-on-month in June, which was well above forecasts of 0.1% and compares with 0.4% in May. On an annual basis, retail sales were up 3.1% versus estimates of 2.6%. This offset somewhat disappointing final PMI readings. The Eurozone’s final composite PMI for July was revised down by 0.1 to 55.7.
It was a busy day for the US with a flurry of data releases. Weekly jobless claims fell by slightly more than expected, indicating continued tightening in the labour market. The number of people claiming unemployment benefits in the week starting July 24 dropped to 240k from a revised 245k in the previous week. Expectations were for a figure of 242k. Other labour market data included the Challenger layoffs. The number of layoffs declined from 31.1k to 28.3k in July.
June factory orders were also out today. New orders for US manufactured goods rose by the fastest rate in eight months in June, increasing by 3.0% m/m. This was just above forecasts of 2.9% and a big improvement on the 0.3% drop seen in the prior month.
The big focus though was the ISM non-manufacturing PMI but ahead of that, the final Markit services PMI for July was released. The services PMI was revised up from 54.2 to 54.7 in July’s final reading. In contrast, the ISM’s non-manufacturing PMI missed estimates of 57.0 to slump to 53.9 in July from 57.4 in May. Further dampening sentiment were sharp declines in the new orders and employment sub-indices, although the prices paid index rose in July, pointing to an uptick in inflationary pressures.
The dollar fell sharply after the ISM data, finding little support from the broadly positive figures of the other US releases. Against the yen, the greenback headed back towards the 110 handle before steadying just above the level in late European session. However, the dollar index managed to stay flat, mainly as a result of the pound’s big losses, and was marginally weaker at 92.81. The focus now is on tomorrow’s all-important non-farm payrolls report.
In commodities, gold gained about 0.2% on the back of the weaker dollar to rise to $1269 an ounce. Oil prices also reversed their earlier losses to turn positive. WTI crude stood at $49.66 a barrel, while Brent was trading at $52.57 a barrel.
