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From the Floor: Bonds rally on dovish BoE — #SaxoStrats

#SaxoStrats
  • •  Bonds rally overnight on dovishness from Bank of England
  • •  BoE concerned about Brexit implications for UK economy: Hardy
  • •  EURGBP climbs to highest closing level since 2011
  • •  US nonfarm payrolls due at 1230 GMT; potential for more USD downside

SaxoStrats banner
By John Acher

Bonds rallied broadly overnight on the back of a dovish message from the Bank of England, which held rates steady on Thursday and expressed concern about the ramifications of Brexit for the UK economy.

Friday's scheduled highlight is the US Labor Department's employment report for July, including nonfarm payrolls, the unemployment rate and average hourly earnings.

"Very, very dovish Bank of England, clearly concerned about the implications of Brexit on the economy,” says Saxo Bank's FX strategy chief John J Hardy. "It is all about Brexit."

"The main thing to note was a very broad-based rally in bonds overnight, of course led by the UK after the Bank of England lowered both its growth and inflation forecasts," says Saxo Bank senior sales trader Christoffer Moltke-Leth. 

BoE governor Mark Carney was also cautious about the outlook for UK economic growth, and that is eliminating any fears of policy tightening in the near future, says Moltke-Leth.

As the pound weakened, EURGBP had its highest weekly close since 2011 at 0.9005 after the BoE's dovish remarks, says Hardy.

 EURGBP climbs as sterling drops
EURGBP
 Source: Saxo Bank

Softer-than-expected US ISM non-manufacturing figures on Thursday knocked US yields, with the 10-year treasury yield falling 5 basis points.

Further political noise emerged from Washington when it was reported that special counsel Robert Mueller will impanel a grand journey in his investigation of Russian interference in the 2016 US presidential election. "And this also seems to weigh a bit on sentiment there," says Moltke-Leth.

Markets expect a 180,000-job increase in July nonfarm payrolls, due at 1230 GMT, and the hourly average earnings component will be especially closely watched.

"If they are in line with expectations, [there will be] no net effect, and if they are worse than expected, that is the bigger risk, especially a disappointment on the average hourly earnings," says Hardy.

"So further downside risk for the USD," Hardy says.

Bank of England
 The Bank of England seems plenty worried 
about Brexit. Photo: Shutterstock


John Acher  is a consulting editor at TradingFloor

2y
Market Predator Market Predator
As the pound weakened, EURGBP had its highest weekly close since 2011 at 0.9005 after the BoE's dovish remarks, says Hardy. "?" The same info in headline (bold letters). Check October-November 2016
2y
John G Acher John G Acher
Total nonfarm payroll employment increased by 209,000 in July, and the unemployment rate was little changed at 4.3 percent, the U.S. Bureau of Labor Statistics reported. Aerage hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $26.36. Over the year, average hourly earnings have risen by 65 cents, or 2.5 percent, the bureau said. https://www.bls.gov/news.release/empsit.nr0.htm

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