Sterling rose after UK companies lower their bets for price growth

Reuters: Sterling rose to a two week high against the euro on Thursday, after a survey from the Bank of England showed British companies’ expectations for selling price inflation had cooled.

BRITISH POUND STERLING ROSE

The BoE’s Decision Maker Panel showed expectations for output price inflation in the coming year fell to 5.3% in the three months to June, compared to 5.4% in the three months to May – the lowest reading since March 2022. But bets that the BoE interest rate will now peak at 6.5% in February capped sterling’s gains, with traders weighing whether the British currency will be hurt by rate increases that could put more strain on the economy. The BoE is watching economic indicators closely as it considers how many more rate hikes are needed to control inflation.

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In an interview with the BBC broadcast on Thursday, BoE Governor Andrew Bailey said the BoE has to set the interest rate “to get UK inflation all the way down to 2%”. “Markets remain highly sensitive to any incoming developments on the price side and the still quite aggressive BoE tightening expectations,” said Francesco Pesole, FX strategist at ING. Expectations for more rate hikes are rising. On Wednesday, money markets were pricing in that BoE rates would peak in March 2024, reaching 6.28%. A month ago, the expectation was for a maximum of about 5.3% by the end of this year, with the first cut a few months later.

The pound was up 0.4% against the dollar to $1.2754 by 1023 GMT, marching towards a 14-month high it touched against the greenback last month. Against the euro, the pound was 0.17% higher at 85.30 pence, its highest level against the single currency since June 21. Traders were also watching economic data for signs of the impact of BoE monetary tightening in the economy. British house building fell in June at the sharpest pace in more than 14 years, excluding two months early in the COVID-19 pandemic, as interest rates drove borrowing costs higher and dampened demand, a survey showed on Thursday.

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The S&P Global/CIPS construction Purchasing Managers’ Index dropped to a five-month low of 48.9 in June from 51.6 in May, below economists’ forecast of 51.0 in a Reuters poll and the 50 level that divides growth from contraction. While conditions weighed on the broad construction sector, the decline was driven by a steep slump in the house building component. S&P’s all-sector PMI, which includes services and manufacturing PMI data released earlier in the week, dropped to a three-month low of 52.5 in June from May’s 53.8.

SOUTH AFRICAN RAND

Reuters: South Africa’s rand weakened more than 1% on Thursday as the Federal Reserve’s June meeting minutes revealed a hawkish policy stance, prompting investors to move away from riskier assets. At 1302 GMT, the rand traded at 18.9975 against the dollar, 1.14% weaker than its previous close. The dollar last traded at 103.180 against a basket of global currencies, around 0.155% weaker, reversing earlier gains.

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Minutes of the Fed’s June meeting, released on Wednesday, showed that a vast majority of policymakers expected further monetary policy tightening, even as they agreed to hold interest rates steady last month. Investec analyst Annabel Bishop said in a research note that the rand weakened in response to increased risk-off sentiment. South Africa’s benchmark 2030 government bond was weaker in afternoon deals, with the yield up 12.5 basis points at 10.640%.

U.S. DOLLAR

Reuters: The dollar held tight ranges on Friday as investors awaited a key U.S. jobs report and weighed the prospect of higher-for-longer Federal Reserve interest rates against the economic growth outlook. The closely watched nonfarm payrolls report is due later on Friday, where expectations are for the U.S. economy to have added 225,000 jobs in June. The release follows data on Thursday that showed private payrolls surged last month while the number of Americans filing new claims for unemployment benefits increased moderately last week, suggesting the labour market remained on solid ground. That sent U.S. Treasury yields spiking as bets grew that the Fed has further to go in raising rates to tame inflation, keeping the dollar elevated in early Asia trade on Friday.

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Against the greenback, the euro slipped 0.02% to $1.0890, while the New Zealand dollar was nursing some of its losses from the previous session and rose 0.09% to $0.6163. Sterling was likewise lower against the dollar and last bought $1.2734, though it had on Thursday risen to a two-week high of $1.2780, as markets bet that the Bank of England will raise interest rates to 6.5% early next year, up from a previous expected peak of 6.25%. “The strong U.S. data boosted market expectations for a second FOMC rate hike, which previously wasn’t considered as possible,” said Carol Kong, a currency strategist at Commonwealth Bank of Australia, referring to an additional rate hike from the Fed after this month’s likely 25-basis-point increase. “Those data points suggest tonight’s payrolls and perhaps the average earnings data could beat the consensus estimate again, and if we do get another strong result, that could firm the dollar further.”

The dollar index rose 0.03% to 103.12, while yields on U.S. Treasuries hovered near their recent peaks. The two-year Treasury yield, which typically reflects near-term interest rate expectations, steadied above 5%, after surging to a 16-year high of 5.12% on Thursday. The benchmark 10-year yield was last at 4.0431%, not far from the previous session’s four-month top of 4.0830%. That kept a closely watched two-to-10-year part of the U.S. Treasury yield curve, seen as an indicator of economic expectations, deeply inverted at a negative 96.90 bps. “The bond market, at least, is still concerned about the impact of restrictive monetary policy in the U.S. on the economy, and in fact, we still expect the U.S. economy to enter a recession later this year,” said Kong.

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Elsewhere, the yen last bought 144.06 per dollar and was on track for a slight weekly gain, reversing three straight weeks of losses. The Japanese currency had been buoyed by safe haven gains this week on the back of dampening risk appetite as worries about the global growth outlook weigh. The Aussie rose 0.09% to $0.66315, though looked set to extend a third straight week of losses, further pressured by China’s faltering economic recovery.

GLOBAL MARKETS

Reuters: Asian stocks slid on Friday to cap a torrid first week of the quarter for financial markets, with the dollar advancing and bonds crumbling as the resilience of U.S. jobs data has investors bracing for interest rates to head higher still. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8% to a one-month low. Japan’s Nikkei fell 0.6%. Overnight, surprisingly strong partial figures on the U.S. labour market sent a selloff in bond markets into overdrive and pushed the S&P 500 stock index 0.8% lower. Two-year Treasury yields burst above 5% and futures pricing started to admit the possibility that the Federal Reserve will raise rates twice before the year is out. Ten-year yields rose more than 17 basis points in two sessions to 4.05%, and selling wrapped around the globe as investors who had positioned for a peak in interest rates bailed out.

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Germany’s two-year bond yield jumped to its highest in 15 years. In Britain, traders are now bracing both for recession and for interest rates heading towards 7%, as selling across the curve drove 10-year gilt yields to post-2008 highs. Three-year and ten-year Australian government bond yields each rose a dozen basis points on Thursday and a dozen more on Friday morning to hit decade highs. “These were pretty savage moves,” said Jack Chambers, senior rates strategist at ANZ in Sydney. “It suggests some longs have maybe been squeezed out, and people caught,” he said, with signs of strength in the U.S. economy starting to stoke nerves about how high rates could rise. “Are we starting to price in the idea that there should be a higher term structure of rates? Maybe there has to be some reassessment given the resilience of a lot of economies to higher rates so far.”

Even well-anchored Japanese government bond yields rose on Friday. Private U.S. payrolls jumped 497,000 last month, the ADP National Employment report showed on Thursday, against expectations for a 228,000 increase. Broader non-farm payrolls data is due at 1230 GMT on Friday. S&P 500 futures were steady in the Asian morning. The buckling bond market sent the U.S. dollar slightly higher, although not too far as yields had leapt globally and the fear of intervention has traders too nervous to short the yen. The euro is down 0.2% on the week at $1.0889. The yen actually rose overnight and is hovering at 144 to the dollar. The Australian dollar was last at $0.6629 and eying a small weekly loss, following the Reserve Bank of Australia’s decision to pause rate hikes this week. The kiwi was at $0.6161 and eyeing a modest weekly rise.

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Data on Friday showed Japanese wages rising at their fastest pace in 28 years in May, although it also showed hours worked rising even faster so hourly rates actually dropped. Elsewhere in markets, Hong Kong banking stocks extended losses and are tracking towards their worst week in more than five years on worries about exposure to local government debt. Goldman Sachs has downgraded the sector. The index fell 0.9% on Friday and is down 10% on the week. The Hang Seng fell 1% and markets in South Korea and Australia fell a little further. In commodities, Brent crude futures were steady at $76.43 a barrel. Gold, which pays no income, was under pressure from higher yields while trading flat at $1,911 an ounce.