BoE: Everything but the kitchen sink!

Week Commencing Monday 8th August 2016

 

BoE: Almost the kitchen sink

The Bank of England has cut interest rates for the first time in more than seven years and issued a stark warned to UK banks to pass on cheaper borrowing costs to customers, in a larger than expected package of measures designed to prevent a post-Brexit recession.

The Bank cut base rate to a new record low of 0.25 percent from 0.5 percent and signalled they may well reduce the rate further in coming months as the economic fallout from the vote to leave the EU becomes clearer.

The bank also extended its quantitative easing program by a further GBP 70 billion, pushing the total size of the program to GBP 435 billion. The additional funds are to be split GBP 60 billion to purchase UK government bonds and GBP 10 billion to purchase UK corporate bonds. A further GBP 100 billion is being made available to provide cheap capital to banks in a bid to both spur lending and passing the rate cut to the real economy.

The bank also cut its growth forecast for the UK economy, with growth predicted to be at a near standstill over the next few quarters and considerable lower in the medium term.

US: Strong jobs do little to pave September hike

Strong US jobs data has led to a break from the current market woes surrounding Brexit, with Asian stocks hitting a new high early Monday morning trading.

Nonfarm payrolls rose by a seasonally adjusted 255,000 in July, according the report published by the U.S. Department of Labour. Despite the rise, analysts however remain convinced that while the U.S. economy is stable, it is not strong enough to persuade the FOMC to push interest rates higher.

The news pushed the Greenback higher across the board, with the Yen firming to 102.08, gaining 0.3 per cent in early Monday trade and extending its slow recovery from Tuesday’s three-week low of 100.68.

The euro dropped to as low as 1.1046 on Friday, its lowest level in over a week. In early Asian trade it stood at 1.1091, flat from late US levels last week.

Sterling dropped to 1.3021, its lowest since early July, and last traded at 1.3078.

Italy: Referendum countdown to start

Italy’s highest court is set to give a green light for a national referendum due to take place in the autumn on major constitutional reform.

Much like Brexit in the UK, the referendum is increasingly being seen as a way for Italians to air their general discontent with the establishment. Voters will go to the polls in October to make the final decision on whether they approve constitutional reforms long championed by Renzi, including a plan to strip the upper chamber of parliament, the Senate, of most of its power and radically cuts its numbers.

Aside from the referendum, Renzi is facing another serious challenge on the political front with the rise in popularity of the anti-establishment Five Star Movement.

 

FX Forecast

EUR/USD's decline last week confirmed continued downside bias on the pair as we draw closer towards the middle of the month. Further falls are to be expected with 1.0911 the key level of Euro support.

GBP/USD's dip and break of 1.3056 level of resistance last week suggests that the rebound from the previous high of 1.3480 continues. Initial bias stays on the downside for this week, with 1.2794 the first level of significant Sterling resistance.

GBP/EUR is seems set to continue to sink after last week’s small rally towards 1.20. Initial bias is mildly to the downside with 1.1592 the first level of targetable resistance to consider. Both GBP and EUR will continue to trade the geo-political spectrum, with any further Brexit developments likely to significantly impact this pair.

 

Economic Calander for the Week

UK Data:

We have a light week ahead for the UK, with Manufacturing Production the only release of note. Given Brexit fears, we expect a contraction this month, however not as severe as the market anticipates. A print of around -0.2 percent would be viewed as somewhat positive, especially in the context of the market expectation of -0.5 percent.

US Data:

A busy week for the US, we Retail Sales (Core and Non-Core) the highlights. We expect Crude Oil Inventories to come in slightly higher given reduced global oil demand. Retail sales will likely disappoint, with non-core expected 0.4 percent versus consensus 0.6 percent, while core should come in 0.2 percent versus 0.7 percent consensus.

US PPI for July should be confirm in at a modest 0.1 percent versus an expected 0.5 percent print.

EU Data:

There are no releases of note this week for the Eurozone, so expect the Euro to continue to trade on the back of continued geo-political sentiment and any further developments regarding Brexit.

 

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