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Euro Weekly Update - July 8th 2016


With the Brexit vote clouding the view investors found nothing to distinguish the euro from the US dollar or the Swiss franc. The euro was unchanged on the week against the franc and just a dozen ticks behind the dollar. Not surprisingly, the euro made further headway against the benighted British pound, strengthening by another three and a half cents to leave it more than 10% above its level on Referendum Eve.

The euro zone ecostats came in mostly above forecast. Purchasing managers' index readings for manufacturing and services were higher on the month, showing stronger - though still not exactly vibrant - growth in the private sector. Retail sales in Euroland were in line with expectations, rising by 0.4% in May to put them 1.6% higher than the same month last year.

On Thursday the European Central Bank published the "account" of the monetary policy meeting that took place at the beginning of last month. Unlike the minutes of similar meetings held by the US Federal Reserve and the Bank of England, the ECB account is a summary, rather than a blow-by-blow report of the proceedings. Even so the account did note that, should Britain vote to leave the EU, "there could be significant, although difficult to anticipate, negative spillovers to the euro area via a number of channels". The Governing Council also thought "the risks to the euro area growth outlook remained tilted to the downside". As far as monetary policy was concerned the Governing Council seemed content to leave it unchanged and wait for developments.

The minutes of the US Federal Open Market Committee, which had come out the previous day, told much the same story. If anything, the FOMC was less inclined than before to pursue a course towards higher interest rates, and that was even before Britain's vote to leave the EU threw a spanner into the global economic works. Investors' concluded that neither the Fed nor the ECB would be adjusting monetary policy anytime soon.

That is not the case with their estimation of future action by the Bank of England. A week ago the governor warned of lower rates and the possibility of renewed asset purchases by the Old Lady. On Tuesday, when he introduced the bank's semi-annual Financial Stability Report, he said nothing to dispel those expectations. Investors are not certain that next week's Monetary Policy Committee meeting will deliver a rate cut but they give it a better-than-evens chance.

The prospect of lower interest rates is one of the factors that weigh on sterling but bigger and heavier ones are the decision to leave the EU and the political upheaval it has caused. According to Conservative Central Office it will be two months before Theresa May or Andrea Leadsom is revealed as Britain's second female prime minister. In the interim there can be no progress on Britain's negotiations with the European Union, a situation which irritates other EU leaders and unnerves investors. The unease continues to weigh on sterling. Further losses for the pound are not guaranteed but, as was the case a week ago, they are easy enough to imagine. A rate cut by the Bank of England next Thursday would do nothing to improve sterling's situation.

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