Good morning,
GBP – Sterling falls as manufacturing sentiment slips
Data yesterday showed that the canary in the coal mine of UK growth chirped anxiously in August with sentiment of manufacturing companies falling to its lowest reading in 2 years. The falls were powered by shrinking confidence shown by businesses that export with even the recent declines in the pound unable to tempt foreign purchasers to the UK’s shores.
Fears over the state of Brexit and the possibility of a ‘no-deal’ scenario cannot be discounted and alongside lower output numbers limited manufacturers’ ability to invest in either their workforce or their wider businesses; we could be only a few months from rising unemployment in the sector as margins are squeezed further. It is unclear what will immediately turn this trend of weakness around for the sector and, alongside last month’s poor number, we have to think that manufacturing will act as a drag on growth in Q3.
Furthermore, and ahead of tomorrow’s services release the credit card company Barclaycard have released a report showing that following worries over rising prices and higher interest rates, a third of consumers say they intend to spend less. There is only so much money to go round and the average UK consumer spent a fair bit of that over the course of the summer.
While we will receive the latest sentiment numbers from the construction sector today, the crucial factor for sterling will be Bank of England Governor Carney testifying in front of the Treasury Select Committee alongside fellow Monetary Policy Committee members Andy Haldane, Michael Saunders and Silvana Tenreyro. Their job will be to explain and justify their decision to hike interest rates at the Bank’s August meeting amid the Brexit back and forth and the middling economic data. Carney will also be questioned on his plans to retire next year.
They begin at 1.15pm BST.
For now, GBPUSD remains range bound between 1.2780 and 1.3030 against the USD and 1.1060 and 1.1170 against the euro.
EUR – Italy fears as budget talks begin
The euro traded quietly yesterday but slipped against the USD as markets continued to get their collective head around the risks posed by the Italian budget negotiations that are due to finish by the end of the week. Optimists see the newly elected government bowing to the pick-up in Italian bond yields and moderate their spending plans accordingly. Pessimists see the levels of Italian debt bringing about another full European bond crisis.
The answer is probably somewhere in the middle but for now, markets are banking on the latter more than the former.
USD – Dollar higher ahead of further Chinese tariffs
As with the euro, the dollar has been trading on the expectation of another political announcement, in this case an increase in tariffs on China. President Trump was seen to cancel a game of golf yesterday to instead ‘place calls on trade’ yesterday, increasing the expectations that another $200bn of tariffs are set to be levied on imports from China.
The US is back from its Labor Day Holiday today and as such we will receive its manufacturing ISM release this afternoon. Once again, it will be interesting to see whether the impact of tariffs are starting to be felt by manufacturers already.
Have a great day.