Bank of England Turns Hawkish; US Payrolls Shift Into Focus
Sterling saw some support in the aftermath of yesterday’s Bank of England meeting, with GBP/EUR testing multi-month highs near the €1.1770 mark and cable holding above the $1.39 level. As expected no changes were made to the policy, with the Bank Rate held at 0.10% and the target for the central bank’s asset purchase programme left at £895bn. What was new, however, was the MPC’s updated forward guidance. With the UK economy set to perform very strongly in the coming years and inflation likely to hold above target through 2022, the central bank now expects that it will engage in modest policy tightening in the coming years.
This was the first time the BoE acknowledged that rate hikes are on the agenda over its forecast horizon, and provided support for our view that the Bank Rate will be raised from 0.10% to 0.25% by the end of 2022. Downside risks facing the UK economy are gradually fading, with real-world data highlighting the effectiveness of vaccines and UK labour market figures remaining strong ahead of the end of the furlough scheme in September. The BoE now projects that its conclusion will result in only a modest rise in unemployment from 4.8% to 5.2% in Q422.
Today, the highlight of the agenda is the US employment report for July, with the focus on the non-farm payrolls figure. The data are of outsized importance, given last week’s message from the Fed that it is reluctant to taper its asset purchase programme without seeing a more complete recovery in the labour market, despite its preferred measure of inflation coming in at 3.5% y-o-y in June (target: 2.0%). At present, payrolls are still some 6.8mn below their pre-pandemic level despite a record number of job openings, as labour supply has been slower to come back online.
Consensus expects that 870k jobs were created in the month, which would be the strongest print since last summer. This forecast is supported by re-opening effects that will boost leisure & education employment, as well as the fact that a number of Republican states have ended enhanced jobless benefits in recent weeks. There are, however, considerable downside risks, the most prominent of which is the persistence of the pandemic. A recent survey by Indeed found that fear of the virus is a key factor depressing labour supply. In terms of leading indicators, the ISM business surveys pointed to a pick-up in jobs growth in July, but it was striking that the ADP payroll came in at just 330k in the month.
We view the report as close to untradeable given the diverse number of factors impacting the data, which is reflected in the extremely wide forecast range (350k-1600k). As a result, we may require a significant up or downside surprise to generate any meaningful reaction in the dollar. An above 1mn payroll print could see cable back down off recent highs as it would raise the risk of the Fed announcing tapering over H221, while a sub-700k reading may provide the catalyst for cable to take another look at $1.40.
It has been a subdued 24 hours for the euro, with EUR/USD holding in a tight band in the lower half of the $1.18-1.19 range. German industrial output figures came in weaker than expected this morning (-1.3% m-o-m vs forecast +0.5%) as supply chain disruptions remained a headwind. Euro impact, however, was minimal, with little else out today to influence the currency.
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