Deutsche Bank analysts note that the UK’s manufacturing PMI slumped to 48.0 last month versus expectations for a 49.5 reading and is also a drop of-1.4pts from May and the lowest reading since February 2013.

Key Quotes

“The details showed that output fell and new orders remained in negative territory too. In fact most of the sub-indices were lower with the associated text noting that “the stranglehold of sustained Brexit-related uncertainty and disruption also weighed heavily on business confidence and employment, as optimism ebbed to one of its lowest levels in the survey history”.”

“Our UK economists noted that current levels are now consistent with prior BoE easing so this will likely increase the scrutiny of the BoE maintaining a tightening bias in the communication. We should also note that consumer credit data for May also slipped yesterday to £0.8bn. Sterling fell -0.46% yesterday while 10y Gilts ended -1.9bps lower.”

  • UK construction PMI records the steepest decline in over 10-years.
  • This coupled with no-deal Brexit fears further weighed on the GBP.
  • A subdued USD demand helped limit downside, at least for now.

The GBP/USD pair held on to its weaker tone and refreshed session lows, around the 1.2615-10 region in reaction to awful UK construction PMI.

Data released this Tuesday showed a sharp loss of momentum for the UK construction sector, with the business activity falling at the fastest pace since April 2009 amid heightened political and economic uncertainty.

In fact, the final UK construction PMI dropped to 43.1 in June – down sharply from 48.6 in May and well below the 50.0 mark for the fourth month in the previous five, and added to Monday's weaker UK manufacturing PMI.

The incoming data have been signalling a slowdown in the British economy, which coupled with persistent fears of a no-deal Brexit continued exerting some pressure on the major for the second consecutive session.

The downside, however, seemed limited, at least for the time being, with the pair managing to hold its neck above the 1.2600 handle amid a subdued US Dollar demand, weighed down by sliding US Treasury bond yields.

Technical levels to watch

The construction sector activity in the UK witnessed a sharp loss of momentum in June and fell at the steepest rate since April 2009 in June, the latest survey report from Markit Economics showed this Tuesday.

The final Purchasing Managers' Index (PMI) posted 43.1 in June, down sharply from 48.6 in May and well below the 50.0 no-change mark for the fourth time in the past five months.

The data dented already weaker sentiment surrounding the British Pound, with the GBP/USD pair falling to fresh session lows and now eyeing a move back toward the 1.2600 round figure mark.

According to analysts at ANZ, the seizure of Baoshang Bank in May has triggered concerns about credit risks of Chinese financial institutions with low credit ratings.

Key Quotes

“Recent efforts by Chinese policymakers to provide assistance have included the use of multiple monetary policy instruments and window guidance.”

“Many Chinese issuers/debtors with lower ratings, especially small and medium enterprises (SME), rely on high risk institutions to finance their operations; it is thus not surprising to see credit contraction subsequently. In response, the State Council has asked the People’s Bank of China (PBoC) to ensure adequate liquidity and reform the current interest rate system to lower the financing cost of SMEs. However, it may take a long time before these plans become reality.”

“Event risks will pose a problem to the progress of supply-side structural reforms in China’s financial sector. Given the overall quality of China’s banks and its financial stability, however, we think systematic risks are low.”

TD Securities analysts point out that after reaching a deadlock, EU leaders broke off their marathon Sun/Mon meeting to decide the next Presidents of the EU Commission. Council, Parliament, and ECB, and will re-convene Tuesday morning at 10am BST.

Key Quotes

“Mentions of Mario Draghi's successor as ECB President have been few and far between, suggesting that leaders may defer that decision to the second half of July (after MEPs are due to vote on the next EU Commission President during the 15-18 July sitting) or even September in order to "de-politicise" it, and instead focus on the more political appointments this week.”