BFX Weekly Market Report – £ under pressure as UK economic recovery data underwhelms markets

Mon 20 Jul 2020
Posted by: William Barns-Graham
Trade News

Bad week for £ - and what’s ahead

Sterling opened last week at recent highs, supported by higher global equity markets and hopes for some kind of Brexit breakthrough, but the UK GDP data disappointed and took the wind from the pound’s sails.

The currency underperformed against its peers last week, coinciding with a strong week for global stock markets over hopes of a Covid-19 vaccine.

The monthly GDP figure was 1.8%, way down from the expected 5.5%, while the rolling 3-month figure was -19.1%, more than the expected 17.5% decline. This was mostly due to a slower rebound in services activity – which makes up around 80% of the UK economy

The £ has also been impacted by low interest rates – at one point last week the yield on two-year gilts dipped below the corresponding return on Japanese government borrowing, making sterling less attractive for overseas investors.

Holds against $

The £ did manage to hold above $1.25 – the midpoint of its 1.22-1.28 range throughout the pandemic.

Disappointing GDP data showing the UK economy ‘only’ recovering by 1.8% in the month of June – compared to market expectations of 5.5% – saw it slide against the $ towards the end of the week.

EU recovery agreement?

Markets are expecting an agreement to be announced by the EU Council on its recovery programme, as the meeting for EU leaders enters its fourth day.

Reports suggest the ‘Frugal Four’ have managed to water down the loans/grants ratio, but markets have reacted to hopes of a deal by pushing up the € and the £-to-€ rate has dropped as a result.

£ down on €

The £ opened last week at €1.1175 but closed the week at €1.0990.

Further bad news for £

Longer-term hopes for the £ have been dented by the view the UK economy is not exiting lockdown with the same momentum as other countries, as well as the ongoing lack of any kind of breakthrough in Brexit talks.

Solid week for equity markets

Equity markets had a solid if less spectacular week compared to recent times, as investors continue to mostly overlook the growing Covid-19 infection rates, particularly in some Southern American states. The markets are looking on the bright side, focussing on vaccine hopes and ongoing global quantitative easing programmes.

Oil, gold and bitcoin

Oil continued to trade in close around the $40pb level, ending the week pretty much where it started.

Gold spent most of the week above $1800. It has consolidated at this level, in part due to the amount of unprecedented money printing.

Bitcoin lost a little ground during the week, holding above the 9000 point.

Quieter week ahead

After last week’s hectic economic data schedule, we have a much quieter week in store. The highlights come towards the end of the week with preliminary June PMI surveys and UK Retail Sales release coming on Friday.

The EU council meeting that started last Friday is set to continue this afternoon (Monday 20 July), with markets reading into this that an agreement is within reach.

The ‘Frugal Four’ of the Netherlands, Austria, Sweden and Denmark have reportedly managed to water down the make-up of the proposed EU post-coronavirus €750bn recovery fund, reducing the ‘hand-outs’ to €390bn.

Talks are reported to have been bad tempered, and if they break down without agreement the €, which has hit 4-month highs, would be sold off.

As mentioned earlier, equity markets have been supported by vaccine hopes, with results of the Astra Zeneca/Oxford University collaboration are expected today.

Economic data highlights

Today                  

  • BOE’s Haldane and Tenreyro speak
  • Bundesbank monthly report
  • The ECB’s Lane speaks

Tuesday              

  • UK public sector borrowing for June
  • Chicago FED activity report
  • Weekly API crude oil stocks

Wednesday        

  • US existing home sales for June
  • Crude oil inventories

Thursday            

  • GFK German Consumer climate
  • UK CBI industrial orders
  • BOE’s Haskel speaks
  • US Initial Jobless claims

Friday                  

  • UK Retail Sales for June
  • UK, EU and US preliminary PMI’s for July
  • US New Home Sales for June