June 21, 2024

“Dovish central bank decisions in Switzerland and the UK sent the franc and sterling tumbling yesterday, leaving the dollar to climb to a six-week high. It’s PMI day today for the UK, eurozone, and US, and so far the eurozone is not looking as rosy as investors had hoped.”

Sam Cornford – Head of Trading

Main Headlines

In France, three polls showed yesterday that the far-right National Rally party, headed by Marine Le Pen, is leading Macron’s centrists and the Popular Front leftist coalition in the race for election. The polls put National Rally at 33-35% of the vote, while Macron’s coalition was down to 20-22%.

UK public debt hit its highest level since 1961 last month, according to borrowing figures released this morning by the ONS. Net debt surged at a slightly slower pace than expected to £2.742tn, now at 99.8% of GDP versus 96.1% only a year earlier

GBP

An unexpected surge in retail sales this morning was unable to reverse any of the pound’s losses in the wake of the Bank of England decision yesterday, where policymakers left an August rate cut firmly on the table.  The 7-2 vote in favour of a rate hold remained, but the policy statement played down the recent upside surprises in services inflation, in part pinning them down to the effects of annual price rises, which should soon subside. As a result, a portion of the MPC saw the decision to hold as ‘finely balanced’. The overall dovish tone boosted the market-implied probability of an August rate cut to 60%, gilt yields fell, and the pound slipped around 0.5% on the day. Retail sales beat the consensus forecast of 1.6% to print at 2.9% last month, although this comes on the back of a 1.8% contraction in April and matters little for the Bank of England outlook. The flash PMIs are the biggest event of today, where estimates point to a continued acceleration in UK economic growth.

EUR

Disappointing French and German PMI data has pulled the euro 0.4% lower already this morning. The French composite index has slipped further into contractionary territory at 48.2, with business activity in both the services and manufacturing sectors disappointing on forecasts. In Germany, services remain above water at 53.5, but manufacturing is back wallowing in the low 40s at 43.4. The eurozone-wide figure arrives shortly this morning, and so far looks set to lose the upward momentum that has kept the common currency buoyant against the dollar despite its dovish outlook compared to the Fed.

Elsewhere, EUR/NOK was a busy cross yesterday, falling to a four-month low after the Norges Bank upped its inflation forecasts and all but ruled out any rate cuts this year.

USD

The dollar has made broad gains over the past couple of sessions, on the back of some increasingly dovish central bank decisions elsewhere and a weaker-than-expected growth outlook in the eurozone. With the Swiss National Bank leading the way in cutting interest rates for the second time and the Bank of England hinting that it could start in August, markets have received a stark reminder this week that the Fed is likely to be much later to the mark. That largely quashed any dollar-negative effects of some weaker unemployment claims and building permits data yesterday afternoon. The US PMIs follow the eurozone and the UK this afternoon, where markets are looking for a moderation compared to the booming May report that showed a one-year high in the pace of expansion in the services sector, in contrast to the softer data of late.

Markets

European stocks have bounced back this week, with the FTSE 100, DAX, and STOXX 600 all up 1% of more amid a dovish rates outlook on the continent and a cooling off in French political turmoil in the markets. US shares pulled back yesterday, meanwhile, knocked in part by some weaker unemployment and housing data.

Main Economic Events (All Times CET)

1:30am: Japanese National Core CPI
8:00am: UK Retail Sales
10:00am: Eurozone Flash PMIs
10:30am: UK Flash PMIs
2:30pm: Canadian Retail Sales
3:45pm: US Flash PMIs
4:00pm: US Existing Home Sales

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