Then came Friday’s nonfarm payrolls report, which not only completely changed the direction of the greenback, but has dramatically altered the market’s view towards the health of the US labour market and, subsequently, Federal Reserve rates.
President Trump’s 90-day tariff deadline has also come and gone, with a whole host of countries now facing significantly higher trade levies. The market reaction was relatively contained, however, which we see as largely due to the fact that most of the major deals have been done, and the expectation that the higher tariffs will only remain in place for a limited period. The US-China trade truce ends next week, but a delay here seems inevitable.
Next up for markets will be Thursday’s Bank of England rate announcement. Another 25bp cut seems highly likely, although we could see a three-way split vote, with remarks that hint at no more than quarterly rate reductions ahead.
GBP
Last week was an unusually quiet one in the UK that was almost entirely devoid of any major macroeconomic or policy news. Sterling instead largely traded at the mercy of broader dollar trends, which triggered a move in GBP/USD to its lowest level since mid-May, before the pair rebounded back towards the 1.33 handle following Friday’s disastrous payrolls report. Concerns surrounding Britain’s fragile fiscal outlook remain prominent, but with the pound left somewhat oversold by the recent move, there is arguably room for a mild pick-up.
Focus this week shifts to Thursday’ Bank of England announcement. Rising inflation and a near total capitulation of the jobs market places the MPC in a quandary. While we expect the majority to vote in favour of a cut, we would not be shocked to see a three-way split, whereby most vote for a 25bp rate reduction, a couple vote for a jumbo cut and one or two opt in favour of no change. Aside from the voting pattern, it will be interesting to see whether the BoE maintains its “gradual and careful” rate guidance. We suspect that it will, although any change here would almost certainly be greeted by a bout of GBP weakness.
