UK Central Bank Could Cut Interest Rates to Deal with Brexit Aftermath
U.S. employment data provided direction to investors who are still anxious about the referendum vote by Britain to leave the European Union. The U.S. added 287,000 jobs, the highest number since October and a shot in the arm for jobs data after the disappointment of the May non farm payrolls (NFP) report. The USD had been higher following the shocking Brexit outcome on flight to safety flows but now the fundamentals drove the USD higher against major pairs but to varying degrees of strength as a sign that economic data remains a secondary factor in the market.
Bank of England (BoE) Governor Mark Carney has been front and center as his Brexit scenarios have started to come true. Criticized by the Leave camp for being biased in his warnings about the impact of the historic vote he has now stepped forward and backed the resilience of the U.K. economy while at the same time announcing an imminent summer rate cut . The July Monetary Policy meeting on Thursday, July 14 at 7:00 am EDT is not when the market expects the rate cut but it could set market expectations on track for the BoE’s super Thursday on August 4. Given the political uncertainty the U.K. finds itself in as parties look for the next leader to guide them following the Brexit vote the central bank is expected to wait, but given the urgency of the situation there is also a probability of a rate cut sooner rather than later.
After the monster NFP report the next big economic indicators in the U.S. will be released on Friday, July 15 at 8:30 am EDT. The US retail sales and inflation releases are not expected to differ from last month’s data, but in the current macro environment sustained growth no matter how slight will be taken as a positive sign.
The EUR/USD lost 0.798 percent in the last week. The pair is trading at 1.1051 two weeks after the shocking victory of the Leave vote in the U.K. Risk aversion has hurt the euro as investors are favouring the USD, CHF, JPY and gold seeking a safe haven from Brexit anxiety. Economic, political and social contagion fears have risen as Spanish elections provided no clear winner and with Italian banks forcing the government into a reform referendum gambit that could spell the end for Italian Prime Minister Matteo Renzi’s tenure. The USD got a boost from the massive NFP report this month.
The U.S. added an impressive 287,000 jobs after the let down in May. There was a further downward revision to the already horrible May data which ended up gaining only 11,000 jobs. The U.S. unemployment rate rose to 4.9 percent with labor participation rising to 62.7 percent. The biggest positive from the NFP report was the year over year gain of 2.6 percent of American wages, matching the fastest growth since the credit crisis. The Canadian Labour Force survey shows a drop in unemployment to 6.8 percent even as the economy lost 700 jobs this month. The lower unemployment rate is explained by a drop in the participation rate to a 16 year low of 65.5 percent.
Overall this has been a strong week for U.S. employment and that has boosted the USD across the board. The Brexit vote has limited the upside as the USD did not have the same reaction that would have been expected in the pre-referendum world. The U.S. Federal Reserve would have been pleased by this week’s data with a rate hike in July a possibility with higher chance of a September monetary policy action. In the new Post-Brexit economic environment a monster NFP is not a game changer, but it still validates the USD as a safe haven in times of market anxiety.
The price of West Texas lost 5.8 percent this week. Crude is trading at $45.18 in a volatile environment triggered by the vote by British residents to break away from the E.U. Oil had a horrible start to the year after Chinese stocks tanked rising doubts about the growth of the nation and its demand for energy despite the rock bottom prices. The public friendly exchanges between oil power houses Saudi Arabia and Russia managed to stabilize markets despite their oil output freeze deal failing to crystallize.
Crude has bounced 10 percent in the last 5 days. From weekly highs of $48.99 down to $44.53. Disruptions in Nigeria added some support to the black stuff even as the U.S. employment data showed a marked improvement. Oversupply remains a concern as global demand for energy is low and producers keep pumping at near record levels making the current fragile price levels even more brittle.
Market events to watch this week:
Tuesday, July 12
Tentative GBP Inflation Report Hearings
Tentative CNY Trade Balance
Wednesday, July 13
10:00am CAD BOC Monetary Policy Report
10:00am CAD BOC Rate Statement
10:00am CAD Overnight Rate
10:30am USD Crude Oil Inventories
11:15am CAD BOC Press Conference
9:30pm AUD Employment Change
Thursday, July 14
7:00am GBP MPC Official Bank Rate Votes
7:00am GBP Monetary Policy Summary
7:00am GBP Official Bank Rate
8:30am USD PPI m/m
8:30am USD Unemployment Claims
10:00pm CNY GDP q/y
10:00pm CNY Industrial Production y/y
Friday, July 15
8:00am GBP BOE Gov Carney Speaks
8:30am CAD Manufacturing Sales m/m
8:30am USD CPI m/m
8:30am USD Core CPI m/m
8:30am USD Core Retail Sales m/m
8:30am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment