Cable printed a one-week high just shy of 1.4000 yesterday, aided higher by a softening in the US Dollar. It is currently at 1.3973, above PP for the day. Earlier in the day there had been a modicum of sterling outperformance, which saw EURGBP fall to a 10-week low at 0.8530, although this move has now reversed slightly higher. The UK currency also hit its highest level versus the Aussie Dollar since last October.
The BoE policy announcement is out today. We think those looking for a shift in guidance will be disappointed, as rather than significant changes in the BoE’s message, we expect confirmation of the stance from May, including a unanimous vote on maintaining the 0.10% repo rate but another 8-1 vote on QE with Haldane, who is leaving the MPC, again dissenting in favor of lowering the size of the quantitative easing program. The BoE is likely to remain optimistic on growth despite the renewed Covid problems, while discounting the acceleration in inflation, still deeming them as temporary.
And now, with the hawkish shift in the Fed, the BoE has cover to continue its current stance. Looking ahead, MPC member Vlieghe has already signalled that labour market developments will be key for the rate outlook, with policymakers waiting to see how it transitions out of the government’s pandemic support measures before making any significant decisions on policy. The wage support, (aka furlough scheme) will terminate at the end of September. Some 3 mln people, most from the hospitality sector, continue to receive 80% of their pay via the furlough scheme. While Vlieghe said that an “early” rate hike was possible, this depended on there being a smooth transition out of the furlough.
The question is whether the reopening economy will be strong enough to absorb this potential slack.
The preliminary June PMI survey data out of the UK showed an unexpected dip in private sector activity, with the composite reading edging to a 2-month low of 61.7 from the series record high of 62.9 that was seen in May. This is still a strong reading, signalling ongoing robust expansion, although the government’s decision to delay the full lifting of lockdown measures (from June 21 to July 19) and continued restrictions on international travel seems to have left its mark.
Nevertheless, the Pound has been bid as the BoE policy announcement looms. GBPUSD is anticipated to remain on an overall steady-to-softening bias, after it reversed back to upper weekly Bollinger bands area, its momentum sustaining a positive bias since July 2020. In the Daily frame, the asset is struggling to recover last week’s losses, with key resistance at 1.4000-1.4020. However the flattening of RSI along with MACD signal line close to zero holds the asset in a neutral zone for the time being. Hence a hawkish stance from BoE today could shift Pound higher.
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Andria Pichidi
Market Analyst
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