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ECB: Stick or twist?

A new government

Whatever the supposed shortcomings of Britain's new prime minister, indecision is not one of them. Within hours of taking office on Wednesday, he had dismissed most of Theresa May's ministers, replacing them with Brexiteers from the back benches. It seems that investors liked what they saw.

There were no UK economic data other than an almost-unchanged BBA mortgage approvals figure for June. There were plenty from Europe and the United States though. Because they were mostly unimpressive, the pound looked good by comparison. It strengthened by an average of 0.2% and would have taken first place had it not been edged out by the North Scandinavian crowns.

The soggy foreign data that contributed to sterling's success were the provisional purchasing managers' index readings. All but one came in lower than expected and Germany's manufacturing sector delivered a 43.1, the lowest in seven years. The equivalent US figure was on the cusp at 50.0, a 118-month low. Across the board, the readings from the services sector were better than for manufacturing.

Antipodean doves

The Australian dollar lagged the field for a second day as a result of the dovish outlook for monetary policy. It lost nearly a cent to sterling and fell an average of 0.3% against the other majors.

Westpac's forecast, released yesterday, anticipates two more rate cuts from the Reserve Bank of Australia. It has brought forward to October the date for the next cut. RBA governor Philip Lowe did not exactly endorse that prediction in his speech this morning but confirmed that "it is reasonable to expect an extended period of low interest rates".  

The NZ dollar had suffered collateral damage as a result of Westpac's rate forecast, sharing last place with the Aussie, but got away with it yesterday and overnight. The Kiwi is unchanged against the US and Canadian dollars and the yen and half a cent lower against sterling.

European Central Bank

When the ECB Governing Council meets today it will certainly be conscious of the economic sluggishness revealed by recent economic data. The general expectation is that the bank will not make any change at this point but that it might want to prepare the market for a relaxation of policy in September.

Investors believe that the softening economy and persistently sub-2% inflation will push the ECB towards a more accommodative monetary policy. They do not see it coming today though. That being the case, the ECB is unlikely to deliver a cut for which the market is unprepared.  

The other high-profile item on today's agenda is US durable goods orders. Nondefense capital goods orders ex-aircraft are forecast to have increased by 0.2% in June. The CBI's Distributive Trades Survey for July this morning could also be interesting: a month ago the CBI said June sales were the worst on record yet the official ONS figures showed a strong increase for that month. On tomorrow's bill, the headline act is second quarter US gross domestic product. An annualised expansion of 1.8% is forecast, down from 3.1% in Q1.

GBP: Investors welcome decisive PM

GBP: Investors welcome decisive PM

SEK: Northern crowns pip sterling at the post

SEK: Northern crowns pip sterling at the post

EUR: Will ECB act on weak data?

EUR: Will ECB act on weak data?

USD: Manufacturing on the cusp

USD: Manufacturing on the cusp

AUD: Dovish thoughts

AUD: Dovish thoughts

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