Daily Market Update: Sterling slips back as BoE officials sound cautious on UK outlook
Friday was a relatively uneventful day in terms of major economic releases.
US existing home sales were a tad firmer than expected, and suggest that housing transactions have firmed some early in Q2 relative to Q1 levels. Elsewhere, the latest Industrial Trends survey from the CBI in the UK was also on the firm side of market expectations with the headline measures of total orders rising to a 5-month high in May. Export orders softened a little, implying the improvement had its origins in better flows of new business domestically – an encouraging (albeit rare and very tentative) sign of some easing in Brexit-related downward pressure on domestic confidence and activity.
Friday also brought some interesting comments from BoE policy makers on the Brexit issue and how it may be impacting the UK economy and its outlook. MPC members Gertjan Vlieghe and Kristin Forbes separately made comments implying that the recent loss of UK growth momentum could be due to more than just the Brexit risk. Vlieghe said “following a vote to remain, I would like to see convincing evidence of an improvement in the economic outlook. If such an improvement is not apparent soon, this will reduce my confidence that inflation is likely to return to the target with an acceptable time horizon without additional monetary stimulus”. Forbes, meanwhile, told the Belfast Telegraph that “we don’t have concrete evidence that some of the softening we are seeing now is all referendum related and uncertainty related… there is a chance other things are going on”.
These cautious comments on the UK outlook - even in a Bremain scenario – have put sterling on the back foot, as the pound gave back some of its recent sizeable gains. Eur/GBP is almost 1% higher at this morning’s open, trading at 77.4p from 76.75p early on Friday, while GBP/USD opens at $1.45 from $1.46 on Friday morning. On the Brexit issue itself, Chancellor Osborne is today set to publish new analysis by his Treasury department of the referendum’s short-term implications outlining that Britain could slip into a year-long recession if it votes to leave the EU. The report apparently sets out two post-Brexit scenarios (one severe and one milder) which posit that the economy could be 3.6% or 6% lower after two years. The Brexit camp have unsurprisingly dismissed the report, claiming that it is biased as they seek to counter Osborne’s latest attempt to focus voters on the potential hit to the UK economy from a vote to leave.
Meanwhile in the US, the weekend brought the latest raft of hawkish Fed-speak to reinforce the more assertive policy messaging of last week’s April minutes. Boston Fed President Eric Rosengren (a voter this year) said that the US is on the verge of meeting most of the economic conditions the Federal Reserve has set to increase interest rates next month. San Francisco Fed president John Williams (non-voter) said that the U.S. economy should be solid enough to merit an interest-rate increase this year, and the central bank won’t cave to political pressure to refrain from tightening during a presidential election year.