Bank of England policymakers grappled with improving wage growth

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialists. Tuesday 14th July 2015 15:00 EDT

In the UK, figures released showed up the weakness in much of British manufacturing which makes up around 80% of total Industrial Production, something Chancellor George Osborne has said he wants to tackle in his budget announcement. Britain's manufacturers have struggled to make much headway in recent months due to a combination of weak demand in Europe and the strengthening of the pound against the Euro. A British employers' group said earlier on Tuesday that Britain's economy remained unbalanced in the second quarter when the dominant services sector grew but manufacturing was weak.

Chancellor George Osborne delivered the first Conservative budget for 20 years and, as predicted, the measures he unveiled were business-friendly. Sterling lost ground against most currencies on the expectation that Chancellor Osborne would introduce more fiscal tightening measures in his budget (i.e. increasing the rate of certain taxes and / or cutting government spending).

As widely expected the Bank of England (BoE) kept interest rates at a record low, as its policymakers grappled with how to balance improving wage growth in Britain against more ominous signals from the global economy. BoE Governor Mark Carney said last week Greece's debt crisis was the biggest looming threat to financial stability in Britain, while a slowdown in the economy of China also threatens to derail global economic growth.

The European Central Bank have been in on-going talks whether to raise its emergency cash support for Greek banks, which are running out of funds and on the verge of collapse. Greece’s Economic Minister, Georgios Stathakis, stated that the ECB had to keep Greek banks alive for 7-10 days so that negotiations could take place, with rumours that the €60 per day ATM restrictions will still be in place up until Friday.

Greece's new finance minister, Euclid Tsakalotos, attended an emergency Greek summit with Eurogroup finance ministers and European leaders in Brussels last week. It was the first round of serious talks since Greek voters resoundingly rejected the terms of a prior bailout offer that expired on June 30. Prime Minister Alexis Tsipras said his government wants debt restructuring as part of its next aid package. In the short term, Tsipras and his new finance minister Tsakalotos will probably have arrived in Brussels with many of the same proposals they had before the referendum. Their main goal will be to start talks on bridge financing, to help Greece get past its upcoming financing hurdles.

“It’s no longer a matter of weeks, but only a few days,” Merkel told reporters on Tuesday in Brussels before a summit of leaders of the 19 euro countries. Greece’s day-to-day struggle for financial survival risks hitting the wall on July 20, when the government redeems 3.5 billion euros ($3.8 billion) worth of bonds held by the ECB.

Greece submitted its formal request for a new aid package in an attempt to avoid crashing out of the Eurozone. Promising signs were there that Tsakaloto's said Greece is proposing to immediately implement measures that could start as early as next week. This would include tax related reform measures and pension related measures, two of the key areas where Greece and its creditors have failed to reach an agreement.

Eurozone leaders have finally reached an agreement after marathon talks over a third bailout for Greece, officials say. EU President Donald Tusk said the agreement was unanimous. He tweeted that a bailout programme was "all ready to go" for Greece, "with serious reforms and financial support". European Commission head Jean-Claude Juncker stated "There will not be a Grexit" referring to the fear that Greece would have to leave the euro. Greece is expected to pass reforms demanded by the Eurozone by Wednesday. Parliaments in several Eurozone states also have to approve any new bailout.

In the US, the pace of growth in the U.S. services ticked higher in June after dropping to a 13-month low in May, as readings on business activity and new orders improved. The ISM said its services sector index increased to 56.0, just short of analysts' expectations of 56.2, from 55.7 in May. This did cause a sell-off of the dollar, as this is now two consecutive months that the non-manufacturing PMI has missed consensus. 

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