25/06/2018 – Sterling Gains Limited as EU Summit Looms

GBP

The pound rose to a six-day high on Friday after a Bank of England meeting revived expectations of a rate hike this year, but fears of a breakdown in Brexit talks this week limited sterling’s gains on Friday.

The central bank kept interest rates on hold but the decision by Andy Haldane to join two other policymakers in calling for rates to rise to 0.75 percent lifted the pound off a seven-month low as expectations grew that the BoE could tighten policy in August. Markets now see a nearly 50 percent likelihood of the BoE raising interest rates in August by 25 basis points and a 90 percent chance of a rate hike happening by the end of 2018.

Nine months before Britain’s exit from the EU, the country seems to be trapped in a period of relatively low growth. In the first quarter of 2018, the economy grew by just 0.1 percent, the slowest rate since 2012. Some market observers say the pound could rise in the coming weeks if economic data suggests any turnaround in the economy because it would help cement expectations of a rate hike. However an EU summit on June 28-29 at which Britain is hoping to make progress in securing a favourable Brexit deal with the EU could hurt the pound if little progress is made.

EUR

IHS Markit’s Euro Zone Composite Flash Purchasing Managers’ Index (PMI), seen as a good guide to economic growth, climbed in June to 54.8 from 54.1 in the previous month and above 53.9 predicted by analysts. The latest PMIs suggest 0.5 percent euro zone growth in the second quarter. That is below the 0.6 percent predicted in a recent poll taken last month, but above 0.4 percent measured in the first three months of the year.

Euro zone economic growth likely put in a decent performance in the second quarter with private businesses growing faster than expected in June, but trade worries knocked manufacturing growth to the weakest in 18 months, a private survey showed. News of faster overall expansion this month, including in two of its biggest economies Germany and France, along with rising price pressures will likely be welcomed by policymakers at the European Central Bank.

Analysts said while this was a step in the right direction, there was no reason to declare the recent slowing trend is over. Accordingly, there was not much movement in the euro when the initial data were released.

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