Sterling struggled for direction for much of yesterday’s session, though the emergence of dollar strength and some euro weakness pushed cable back down below $1.39 and GBP/EUR up near to the €1.175 mark. The UK calendar was reasonably quiet, though we did see a big upward revision made to the final reading of the UK’s composite PMI for July. This was driven by an improvement in the operating environment following Freedom Day, which partly offset the impact from the ‘pingdemic’. We expect activity will further pick up in August, as the impact from the loosening of UK Covid restrictions and a decline in daily infections feeds through, which could offer some support to sterling.
Today, the highlight of the schedule is the Bank of England’s July policy meeting. In line with consensus, we anticipate that no changes will be made to the policy, with the Bank Rate kept at 0.10% and the central bank confirming it will continue to buy bonds at a weekly clip of £3.4bn until the end-of-year. The decision on the latter is unlikely to be unanimous, given that we’ve heard two officials argue in favour of prematurely bringing a halt to the central bank’s bond-buying activity in recent weeks. These officials are concerned that there is a real risk that inflation will hold sustainably above the BoE’s 2% inflation target if supports are not withdrawn in the coming months. However, we expect Governor Bailey to continue to characterise the recent increase in price pressures as transitory today.
In terms of sterling’s reaction, the immediate focus will be on the voter breakdown. If more than two officials vote for tapering, the cable could test the key $1.40 level and GBP/EUR may break toward €1.18. However, if there are no dissenters, the cable could retreat back to $1.38, while GBP/EUR may struggle to hold above €1.17. Markets will also be interested to see how the central bank’s macro projections have evolved since May, with a particular focus on the unemployment forecast. Uncertainty surrounding how the end of furlough will impact labour market conditions is a key factor behind the BoE’s reluctance to tighten policy, so a downward revision to the jobless rate estimate (currently 5.8% for Q321) would represent a sterling positive.
The dollar saw decent support yesterday, with EUR/USD trading back down into the lower half of the $1.18-1.19 band. This was driven by hawkish comments from a previously dovish Fed official (Richard Clarida), who indicated that he saw scope for rate hikes in 2023 if the unemployment rate ends 2022 at 3.8% and inflation remains near its 2% target. The greenback was also boosted by a strong reading of the non-manufacturing ISM in July, which pointed to an unexpectedly sharp acceleration in growth and an increase in new hiring in the services sector. Looking to the day ahead, there is little out to influence the dollar, with the focus now firmly on tomorrow’s non-farm payroll data for July.
The euro at times found itself on the back foot yesterday, losing some ground as the final estimate of the eurozone composite PMI for July was revised lower. This morning, German industrial orders for June came in considerably stronger than anticipated (+4.1% vs forecast +1.5%). The data had minimal FX impact, but provide further evidence that strength in manufacturing activity may persist for longer than we had envisaged. Looking ahead, the eurozone calendar has a barren look to it, suggesting the single market currency may struggle for direction today.
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