FX Week Ahead – Pressure on BoE to cut rates; PMI data also in focus

The Bank of England meets next week in a highly anticipated meeting where the Bank is expected to cut rates for the first time since 2009. The Reserve Bank of Australia also meets and will likely ease policy too. The latest PMI survey data for the Eurozone, UK, US and China will also be watched as investors look for signs of any negative impact on growth from Brexit, while the July non-farm payrolls report out of the US will for sure attract attention too. 

China PMI to remain stable 

The latest PMI data out of China will start the week on Monday but are not expected to reveal any turnaround in the country’s beleaguered manufacturing sector. The official manufacturing PMI is forecast to hold steady at 50.0 in July, indicating that output was flat over the period. The private Caixin PMI survey is also out the same day and is expected to show a slight improvement from 48.6 to 48.7 in July. However, the figure remains in contraction territory with the yuan’s recent depreciation yet to provide a boost to exports. 

Quiet week for the Eurozone 

PMI numbers will also be the main data out of the Eurozone next week, in addition to producer prices and retail sales. The final reading of the Markit composite PMI for July is expected to be confirmed at 52.9 on Wednesday. If confirmed, this would indicate only a minor worsening in economic activity in the euro area immediately after the Brexit referendum. The euro has found support over the past week from stronger-than-expected business sentiment surveys, so it could prove sensitive to any unexpected downward revision. 

Also to watch for the Eurozone is the latest producer price index, which is expected to show an increase from -3.9% y/y in May to -3.5% in June, as well as retail sales, which are forecast to ease slightly to 1.5% y/y in June. 

RBA expected to deliver second rate cut this year 

The Reserve Bank of Australia will be the first of the two major central banks to hold its policy meeting this week. The Bank holds its August meeting on Tuesday and is widely expected to reduce its cash rate by 25bps to a new record low of 1.50%. However, the move has become less certain following this week’s inflation figures. CPI data out on Wednesday showed underlying inflation in Australia in the second quarter was not quite as weak as had been expected, suggesting that some members of the RBA’s board may resist further easing so soon after May’s cut. 

In addition to the RBA’s decision, trade data on Tuesday and retail sales numbers out on Thursday will also be eyed. 

BoE to cut rates but talk of corporate bond purchases intensifies 

The Bank of England surprised markets when it kept policy on hold in July. However, the Bank has already signalled that it will likely ease monetary policy in August with strong expectations that it will cut its base rate from a record low of 0.5% to 0.25%. However, there is speculation that the Bank will combine this with some type of quantitative easing, which could take the form of corporate bond purchases, following in the footsteps of the European Central Bank. 

As the UK economy starts to feel the heat from the Brexit fallout, which has led to businesses paring back investment and hiring plans, a cut in interest rates alone may not be enough to stave off a recession given that there is limited room to manoeuvre with rates already near 0%. This has raised the prospect of the BoE joining other central banks in introducing negative interest rates. Whatever the BoE decides on Thursday, the pound will likely face further downside pressure over the coming months as monetary policy is loosened. 

Also important next week are the final readings of the manufacturing and services PMIs and the first and only reading of the construction PMI. No revision is expected in the manufacturing PMI (on Monday) and the services PMI (on Wednesday) but the construction PMI due on Tuesday is forecast to sink deeper in negative territory to 43.8 in July. This would indicate that all the main sectors of the UK economy contracted in the first month after the Brexit vote. 

Non-farm payrolls to slow in July 

The US will have the busiest calendar next week with a number of survey data due, as well as the latest non-farm payrolls and personal consumption expenditure figures. 

The all-important ISM manufacturing PMI will start the week on Monday and is expected to ease slightly from 53.2 to 53.0 in July. The figure has remained above 50 since March, suggesting the US manufacturing sector is seeing continued expansion. The non-manufacturing composite is out on Wednesday and is also forecast to fall slightly, from 56.5 to 56.0 in July. 

Personal spending and income data is released on Tuesday, which should show another healthy growth in US incomes and consumption. Personal income growth is forecast to quicken slightly from 0.2% in May to 0.3% in June, while consumption is expected to stay unchanged at 0.4%. The Fed’s favourite inflation gauge, the core PCE price index, is expected to hold steady at 1.6% y/y in June. 

On Wednesday, the ADP employment report should give a glimpse as to what to expect in Friday’s non-farm payrolls numbers, while on Thursday, the June factory orders will also be watched. The main focus though will be Friday’s jobs report. 

Non-farm payrolls for July are forecast to rise by 180k, down from the previous month’s 287k but above the 100k level that is considered by the Fed as necessary to provide jobs for new entrants into the labor force. Average hourly earnings are expected to pick from 0.1% to 0.2% m/m in July. 

Following the disappointing GDP estimates for the second quarter, a weaker payrolls number would likely drag the dollar lower as it would further dampen expectations of a Fed rate hike anytime soon.