UK Recession Fears Mount

4TH July 2019 Market Update

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🇬🇧 GBP –  UK services PMI fell short of expectations yesterday morning showing that growth slowed from 51 in May to 50.2 in June. The data adds to the woeful set of data this week where the manufacturing sector shrank at its fastest pace in six years falling to 48 and the construction sector plunged to the worst in the decade to 43.1.

Overall the private sector contracted for the first time since June 2016 with the average PMI reading across all three sectors dropping to 49.2. Economists are now suggesting that following this, the UK economy may have contracted by 0.1% in the second quarter of 2019. Should growth in the third quarter also contact then the UK would technically be classified as being in recession.

Sterling dropped on the back of the data as investors are thinking that the Bank may need to deliver an interest rate cut to ward off a recession.

In other news Mark Carney, who is due to leave his post as BoE governor in January, is now bookmakers’ favourite to replace Christine Lagarde as managing director of the International Monetary Fund following her nomination as president of the European Central Bank. Former chancellors of the exchequer George Osborne and Gordon Brown are also eyeing up the role

No data out today but the negative sentiment on the pound remains.

🇪🇺 EUR – The euro was boosted yesterday by news after flash composite PMI data beat expectations rising to 52.2 in June from 51.8 in May, signalling a pick-up in economic growth for the Eurozone.

The news will please Christine Lagarde, who yesterday was appointed as the new ECB president when Mario Draghi steps down in October. So far investors are viewing that Lagarde will take a dovish approach to running the ECB and thus continue with its quantitative easing and low interest rate programme. As a result, German 10-year bond yields are now trading at nearly -0.4%.

Today we have ECB member Lane and De Guindos speaking at 8.00am and 10.10am respectively as well as retail sales data due out at 10.00am expected to show an increase to 1.6% in June from 1.5% in May.

🇺🇸 USD –  Bets on an interest rate cut intensified yesterday after the ADP jobs report showed that only 102,000 jobs were added in June. It may suggest that the wider employment report, nonfarm payrolls, may also disappoint on Friday.

Donald Trump’s efforts to reduce the US trade deficit took a blow yesterday with the deficit rising to a five-month high in May. Despite tariffs being imposed on China, the deficit between the two nations rose by 12.2% when compared to a year ago now standing at US$30bn. The data may well have led to Trump tweeting that “China and Europe are playing a big currency manipulation game and pumping money into their own system in order to compete with USA” and later added that the US, i.e. the Fed, should “match” the monetary policies of China and Europe.

US services figures were mixed. Markit’s data increased to 51.5 in June whilst ISM suggested that the figure dropped to 55.1.

No data out today with the country closed for 4th July celebrations.

 

Summary:

GBP: Growth in Q2 forecasted to contract
EUR: Services PMIs pick up and Lagarde appointed ECB president
USD: Trump stirs up currency manipulation talk


 

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Darren Kilner

Darren Kilner

Darren is Head of Dealing at FairFX. Darren lives and breaths FX, his Mastermind topics are G8 currencies and economic forecasts.

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