US Dollar remains strong as BoE and ECB hold
LONDON (Aug 2) Central Bank Thursday turned out to be a bit of a bore yesterday with both the Bank of England and ECB holding policy and keeping schtum on their thoughts of the future. Maybe last month’s ‘forward guidance’ revelations from the both spoiled us.
The Bank of England left policy at 0.5% and £375bn of asset purchases as was widely expected, although sterling did appreciate in the wake of the announcement as some market participants had expected a rate cut to 0.25% or an increase of QE to herald the start of the new, looser one tray policy regime. It was not forthcoming. What this does however, is set next week’s Quarterly Inflation Report up as a watershed for UK policy and, therefore for the pound and UK sovereign debt as well.
We think that the Bank’s pronouncements will be largely sterling negative.
The ECB meeting and press conference was also nothing to write home about with Draghi giving the impression of someone looking forward to a summer holiday. Rates will remain at present or lower levels “for an extended period” according to the ECB Chair, as he emphasised last month. When commenting on the European economy, Draghi reiterated that despite a six quarter contraction in output, recent indicators have shown some further improvements in economic activity from low levels.
European PMIs yesterday certainly seemed to suggest that green shoots are coming. The Eurozone-wide measure rallied to 50.3, the first expansion of the continent’s manufacturing sector since July 2011. Germany, Ireland, Italy, the Netherlands and even Greece managed to beat expectations with Spain and France disappointing.
The UK’s number was also very encouraging. Last month’s 52.5 reading was the highest reading for the series in 2 years, so beating it was always going to be difficult but yesterday managed to top it comprehensively (54.6 vs 52.8 expected) and gave us 4 consecutive months of growth. New orders seem to have risen to the highest level since February 2011 and the encouraging sign is that export business to key areas away from the Eurozone i.e. China, the US and the Middle East rose too. The strong new orders component allows us to keep a bullish tilt towards the UK’s manufacturing sector over the coming months, something that should see manufacturing employment move higher through Q3 as well.
On the subject of employment, there is little else to concern us as we close out the week. Today is of course Non-Farm Payrolls Friday and could easily set up another run higher for the USD. Predictions range from a bullish 225,000 jobs added to a downright nihilistic 23,000 with consensus around the 185,000 mark. If Wednesday’s ADP report is anything to go by, then a strong number could be on the cards. ADP typically underestimates the number of jobs added to the US economy and so a beat of its 200,000 reading could easily materialise. The number is due at 13.30 BST.
Before that we have the UK’s construction PMI reading at 09.30 and European PPI at 10.00