The pound dropped back below the 1.33 level against the dollar on Thursday after the Bank of England Governor Mark Carney hinted at a summer rate cut. In a live broadcast, Carney told reporters yesterday that “some monetary policy easing will likely be required over the summer” as economic growth in the UK takes a hit from the Brexit fallout.
The news boosted stocks but weighed on the pound as most analysts now expect for the Bank of England to cut rates by a 0.25% in August when the Bank will publish its latest economic projections. Sterling hit a low of 1.3205 dollars after Carney’s statement, having traded above 1.34 dollars beforehand. London equities however jumped on the rate cut hopes and the FTSE 100 surged to a near one-year high to close 2.3% higher on the day.
The pound had found support earlier yesterday from the unexpected news that Brexit campaign leader, Boris Johnson, will not run for Conservative party leader. Markets reacted positively to the announcement as it increases the chances of the UK Home Secretary Theresa May to become the next British Prime Minister, who is regarded as a safer pair of hands. The pound recovered back above the 1.33 level in Asian trading today but was weaker against the yen at 136.65 yen.
The euro also came under pressure against the dollar yesterday, first from upbeat US data but later from reports suggesting that the ECB is considering loosening the rules of its asset purchase program. It follows concerns that the ECB may be running out of government bonds to purchase as investors shift their funds into safe-haven assets following the Brexit vote.
The single currency briefly fell to 1.1024 dollars yesterday but was attempting to claw back above 1.11 dollars in Asian trading today.
Meanwhile, the yen was back in demand on Friday after falling back yesterday. The dollar broke above 103 yen at the start of Asian trading but had slipped to 102.66 yen after a flurry of data releases out of Japan today.
Household spending in Japan fell by a bigger-than-expected 1.5% in May, while the unemployment rate stayed unchanged at 3.2%. Inflation data met estimates with the core CPI coming in at -0.4% year-on-year in May. The figure is down from -0.3% in April and keeps open the possibility of further monetary stimulus. Also out today was the Bank of Japan’s quarterly business confidence survey. The Tankan survey for the second quarter was mixed, though slightly better than expected. However, it was conducted before the Brexit referendum and the business outlook is expected to deteriorate over the coming months.
Data out of China was also mixed today as the non-manufacturing PMI improved on the previous month but the manufacturing PMI fell slightly to 50.0, indicating that manufacturing activity was flat in June. The alternate Caixin manufacturing PMI was weaker-than-expected though as it fell to 48.6 in June from 49.2 in May.
The yuan hit another 5½ -year low of 6.6584 to the dollar today following the data as expectations grow that Chinese authorities will announce fresh stimulus measures soon.
Coming up later today, the final June manufacturing PMI for the Eurozone is due along with the region’s unemployment rate for May. The UK will also see manufacturing PMI data and in the US, the latest ISM manufacturing PMI will be watched.
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