Yesterday provided a rather lackluster session and one that typifies summer market conditions. In Europe major bourses were slightly lower, giving back some of the gains picked up on the first day of the month. It was a similar story in the US, the Dow Jones briefly breached the mythical 22,000 figures leveraged by strong Apple earnings before profit taking limited the advance, the Dow closed up .1% while other indices were little changed on the day. Another day and another drop for the USD, the dollar index fell to fresh 2.5 year lows as expectations for another Fed hike this year continue to diminish, while the market builds itself to a furor on expectations of ECB hawkishness. EURUSD breached the 1.1900 marker late afternoon but finds itself back below 1.1850 now, while GBPUSD touched 1.3250. GBP more or less holding onto its recent ranges where we saw a slight break out before a quick recovery back, market preferring to wait for today’s BOE “Super Thursday” before deciding the next step for GBP. Overnight trade saw sentiment somewhat weaker with Asian indices trading lower and major pairs back within recent ranges.
All eyes are on the UK today and GBP has been range bound much of this week as a result. Sterling shrugged off yesterday’s weaker construction PMI print and if anything the pound found its direction dictated by other currencies. GBPUSD traded to highs of 1.3251 but broadly yesterday’s indicated range of 1.3245 to 1.3200 is likely to hold until mid-morning , while EURGBP traded as high as .8989 the top end of yesterday guided range between .8990 and .8920/8890 area. These ranges are unlikely to hold today however as markets await the BOE policy decision and quarterly inflation report at noon. First up however, is the services PMI print and reaction to this will likely be muted as markets await the hard hitting data.
There is no change expected from the MPC, interest rates are expected to be held at record lows at .25% and their asset purchase target at £435 bln. It’s likely the inflation report will take most of the focus as markets look to assess recent assessments of the BOE and look for guidance on future policy moves. UK data has been mixed and there has been some signs of slower growth through 2017 but as inflation continues to overshoot target and the labour market appears robust (aside from real earnings) speculation has mounted the BOE will be taking a more hawkish stance, however this leaves sterling vulnerable.
It’s been exactly a year since the BOE reacted to Brexit concerns and cut rates to record lows and started QE again. For the most part the UK has been resilient to shocks and the initial fears of a hard crash for the UK did not materialise, we’ll argue the real pain of Brexit has yet to be felt as it has been business as usual for the last year with the assistance of record low rates and QE, but that’s irrelevant for now. There was a shift in voting last time around, where we saw 3 members vote to hike interest rates as inflation overshoot was putting pressures on real earnings in the UK, however given the stronger pound in recent months, price growth has slowed while we’ve seen a slight pick-up in wage growth in that time as well.
We also see one new member joining the MPC panel, Silvana Tenreyro and is likely to side with the majority of the panel. For us this creates downside risks for GBP, especially given hawkish expectations in markets. Mark Carney has been anything but clear in recent months but given the ongoing Brexit negotiations and the risks to the UK economy of fallout or shock, Carney and co will likely still want to tow a cautious line and removing accommodation too soon could create greater concerns. GBPUSD still finds resistance above 1.3245/50, a break above there and 1.3375 offers next resistance. The downside may be fast however and a break sub 1.3055 will open up additional downside for GBPUSD. EURGBP finds resistance at .8990, then .9050/60 area above that. Any GBP rallies will need to see support around .8888 give way for additional downside.
A weaker ADP employment report didn’t help the USD yesterday with selling in the greenback accelerating after the print Attention today will be on ISM services data, factory orders and durable goods orders. Only factory orders are expected to have picked up so the USD remains vulnerable. EURUSD resistance at 1.1910 is focus for the upside, while euro buyers will be looking towards 1.1795 for initial support.