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EUR Weekly update

The US dollar index – a measure of the value of the US dollar relative to the value of a basket of the other most actively-traded currencies – fell to its lowest level since July 5th following the release of weaker-than-expected GDP data on Friday. The US advance second quarter GDP growth came in at 1.2 percent, below the expected 2.6 percent; leading investors to question the likelihood of a Federal Reserve interest rate increase this year.

The latest data detailing domestic economic performance in the post-Brexit period delivered – unsurprisingly – a downbeat message for the pound, which retreated in value against the euro and US dollar as a result. Expansion in Britain’s manufacturing sector slowed up more than expected in July, as the sector expanded at its lowest pace in over three years, following the EU referendum. The manufacturing purchasing managers’ index (PMI), dropped to 48.2 in July, from 52.4 in June. This was swiftly followed by the final reading of the UK services PMI for July came in at 47.4, down from 52.3 in June and in line with the flash reading two weeks ago.

The composite index of services and manufacturing, which is closely watched by policymakers at the Bank of England, was lower than the initial estimate, down from 51.9 in June to 47.3; marking the lowest level since April 2009 and the biggest one month drop in the 20 year history of the survey. Confirming that the UK economy is slowing at its fastest rate since the financial crisis, following the Brexit vote.

Sterling’s reaction was somewhat counter-intuitive; making gains against both the euro and US dollar. Such a move would normally be considered a wholly disproportionate reaction to pessimistic data. However, the PMI has catalysed a round of short-covering that was almost bound to take place ahead of the impending interest rate decision by the Bank of England.

Bank of England (BoE) policy makers voted unanimously to cut interest rates for the first time since March 2009, taking the base rate to a new low of 0.25%. To call this loosening of monetary policy a forgone conclusion prior to the decision would have been an understatement; such was the need for post-Brexit economic stimulus. Other measures – all of which were more aggressive-than-expected – announced by the central bank that aim to do just that include buying £60bn of UK government bonds and £10bn of corporate bonds. This caused the pound to plunge against the euro and decline to its lowest level against the dollar since July 5th.

In reducing its growth prediction for 2017 from the 2.3% it was expecting in May to 0.8% – its biggest growth forecast cut since it began making them in 1992 – the BoE also signalled that a “markedly” weaker growth outlook meant further cuts towards zero were likely in the coming months.

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