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Risk sentiment was the initial driver of price action during the morning London session, since battle lines were clearly drawn between the safe-havens and the higher-yielding currencies.

And since risk aversion prevailed, the higher-yielders got stomped to the ground by the safe-havens, with the yen coming out on top and the Swissy and Greenback neck and neck for second place. The Kiwi and Aussie, meanwhile, got the worst of it.

However, the pound later stole the show when all BOE MPC members unexpectedly voted for a hike, which caused the pound to spike higher across the board and overpower the yen.

Sellers quickly tried to fade the spike, though, likely because the BOE’s meeting minutes and Inflation Report warned about Brexit and hinted at a slower tightening path.

And when BOE Guv’nah Carney began to speak, the pound’s retreat devolved into an all-out rout, so much so that the pound later lost out to the Aussie and Kiwi and was therefore the worst-performing currency of the session.

  • SECO Swiss consumer climate: -7 vs. steady at 2 expected
  • Spanish unemployment change: -27.1 vs. -87.6K expected, -90.0k previous
  • Swiss retail sales y/y: 0.3% vs. 0.0% expected, 0.4% previous
  • Swiss manufacturing PMI: 55.8 vs. 52.8 expected, 53.1 previous
  • U.K. construction PMI: 55.8 vs. 52.8 expected, 53.1 previous
  • Euro Zone PPI m/m: 0.4% vs. 0.3% expected, 0.8% previous
  • 9-0 vote to raise the Bank Rate by 25 bps to 0.75% (7-2 vote was expected)
  • 9-0 vote to maintain stock of government bonds purchased at £435B
  • 9-0 vote to maintain stock of corporate bonds purchased at £10B

Major Events/Reports:

MPC decision, minutes, and inflation report

The BOE’s MPC released their latest inflation report, as well as the minutes for their latest monetary policy huddle late into the session. And as usual, below are some of the more important and/or interesting points in, well, bullet points for easier reading:

  • 9-0 vote to raise the Bank Rate by 25 bps to 0.75%
  • 7-2 vote was expected
  • 9-0 vote to maintain stock of government bonds purchased at £435B
  • 9-0 vote to maintain stock of corporate bonds purchased at £10B
  • The MPC continues to recognise that the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal.”
  • [T]he main challenges for the Committee had continued to be to assess the economic implications of the United Kingdom withdrawing from the European Union and to identify the appropriate policy response to that changing outlook.
  • The Committee also judges that, were the economy to continue to develop broadly in line with its Inflation Report projections, an ongoing tightening of monetary policy over the forecast period would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.”
  • Other than that, the BOE also upgraded its GDP growth projections for 2018 and 2019, as you can see in the table below.
  • The stronger GDP forecasts reflect “accommodative financial conditions, relatively robust global growth [which are] projected to support UK demand, particularly investment and net trade.”
  • The BOE also upgrades its CPI forecasts for 2018, 2019, and 2020.
  • And according to the BOE the CPI upgrades reflect “recent developments in energy prices and the exchange rate” which made the inflation outlook “a little stronger than it had been at the time of the May Report.”
  • Interestingly enough, and despite the stronger growth and CPI forecasts, the BOE also downgraded the projected path for the Bank Rate.
Source: BOE August 2018 Inflation Report
Source: BOE August 2018 Inflation Report

BOE Carney Speaks

As mentioned earlier, the BOE downgraded the projected path for the Bank Rate, which means a slower pace of hiking.

And, well, Carney basically reinforced the idea that the BOE will be hiking at a slower pace during his presser, which is still ongoing, by the way.

To quote the man himself (emphasis mine):

“In this environment an ongoing limited and gradual tightening of monetary policy is likely to be required in order to return inflation sustainably to its target at a conventional horizon.”

“Limited because we think the structural factors that have pushed down the trend equilibrium real rate are likely to persist.”

“And gradual because we think the domestic short-term factors (particularly headwinds from uncertainty and fiscal drag) will fade slowly.”

As a result, rates can be expected to rise gradually. Policy needs to walk, not run, to stand still as equilibrium rates rise gradually.”

Carney also talked a lot about the uncertainties surrounding Brexit negotiations, noting that there are “some signs [that] business investment is softening.”

U.K. construction PMI

The U.K.’s July construction PMI report was released earlier. And it showed revealed that the headline reading jumped from 53.1 to 55.8, which is the strongest reading sinc May 2017.

And the reading gets even better because the market was expecting a drop to 52.8.

And according to Markit, the better-than-expected reading was driven mainly by the strongest expansion in residential construction activity since December 2015.

However, other categories also didn’t disappoint since “Commercial work also picked up at the fastest pace for just over two and-a-half years,” while “Civil engineering activity increased only moderately, albeit at a sharper rate than in June.”

Moreover, “July data pointed to the strongest increase in total new orders across the construction sector since May 2017.” Furthermore, “The rate of employment growth was the fastest since December 2015.”

So far, so good, right? Sadly, “Input cost inflation eased to a three-month low in July.”

Another bit of disappointing detail is that “Brexit-related uncertainty continued to hold back business optimism in July.”

Intense risk aversion in Europe

Europe was cursed with an intense bout of risk aversion during today’s morning London session since almost all of the major European equity indices opened lower and then proceeded to plumb fresh intraday lows as the session took its course.

And market analysts say that markets got hit by a one-two punch of disappointing earnings results for European companies and trade-related jitters.

  • The pan-European FTSEurofirst 300 was down by 0.93% to 1,512.59
  • Germany’s DAX was down by 1.72% to 12,517.43
  • The blue-chip Euro Stoxx 50 was down by 1.26% to 3,464.85

U.S. equity futures were also taking hits, so it’s likely that the risk-off vibes will continue into the upcoming U.S. session.

  • S&P 500 futures were down by 0.60% to 2,794.00
  • Nasdaq futures were down by 0.71% to 7,225.00

Global bond yields fall

Another sign that risk aversion was the dominant sentiment in Europe was the strong safe-haven demand for bonds, which caused global bond yields to fall.

  • German 10-year bond yield down by 8.13% to 0.452%
  • French 10-year bond yield down by 2.21% to 0.770%
  • U.K. 10-year bond yield down by 1.38% to 1.361%
  • U.S. 10-year bond yield down by 0.88% to 2.977%
  • Canadian 10-year bond yield down by 0.72% to 2.352%

Major Market Mover(s):

GBP

The pound was initially mixed before surging higher across the board when all BOE MPC members unexpectedly voted for a hike.

Sellers quickly charged in, however, likely because the BOE’s meeting minutes and Inflation Report warned about Brexit and hinted at a slower tightening path.

More sellers later rushed in when BOE Guv’nah Carney began to speak, very likely because Carney warned about Brexit and also blatantly spelled out that the BOE only wants to tighten at a slow pace when he flat out said that “policy needs to walk, not run.”

GBP/USD was down by 58 pips (-0.45%) to 1.3025 after jumping to a session high of 1.3124, GBP/JPY was down by 91 pips (-0.62%) to 145.16 after jumping to a session high of 146.31, GBP/CHF was down by 55 pips (-0.43%) to 1.2951 after jumping to a session high of 1.3039

JPY

The risk of vibes were a real boon for all the safe-haven currencies, with the yen getting the biggest boost of all, probably because bond yields were also down hard.

USD/JPY was down by 20 pips (-0.18%) to 111.44, AUD/JPY was down by 32 pips (-0.39%) to 82.06, NZD/JPY was down by 31 pips (-0.41%) to 75.30

Watch Out For:

  • 12:30 pm GMT: U.S. initial jobless claims (220K expected vs. 217K previous)
  • 2:00 pm GMT: U.S. factory orders (0.7% expected, 0.4% previous)