GBP/USD Rises on ?Super Thursday? After Services PMI Beats Forecasts

August 3, 2017 - Written by Toni Johnson

STORY LINK GBP/USD Rises on ?Super Thursday? After Services PMI Beats Forecasts

The British Pound to US Dollar exchange rate has struck a fresh 11-month high today in anticipation of the upcoming Bank of England (BoE) releases.

GBP/USD is trading at $1.3251, supported also by a stronger-than-expected uptick in the UK’s latest services PMI.

Britain’s dominant sector saw the purchasing manager’s index from Markit rise from 53.4 to 53.8, instead of the 53.6 expected.

Chris Williamson, Markit Chief Business Economist, warns that the survey continues to point to downside risks, however;

‘The service sector PMI indicates that businesses remain in expansion-mode despite heightened uncertainty about the outlook, but also highlights how the risks to future growth remain firmly biased to the downside.’

Markets Braced for ‘Super Thursday’ - Will BoE Deliver a Boost for GBP?

There is plenty on the horizon for the markets to digest during this Bank of England ‘Super Thursday’.

Will the MPC deliver a surprise rate hike? How will the vote be split, regardless of outcome? Will new policymaker Silvana Tenreyro turn out to be as dovish as expected? Will inflation and GDP estimates be revised in the inflation report? Will the possibility of an early exit from quantitative easing be discussed?

According to Credit Suisse FX Strategy Research;

‘Since [June’s meeting] the composition of the MPC has changed, with Kristin Forbes leaving and replaced by Silvana Tenreyro, who is perceived to be less hawkish than her predecessor.’

‘As a result, our economists now expect a 6-2 vote count in favor of an unchanged outcome. A 5-3 vote tally would be perceived on the margin as a hawkish development, in our view.’

Bank of America Merrill Lynch FX Strategy Research also expects a 6-2 split in the vote, stating;

‘We think the risks are probably asymmetric for GBP heading into the meeting; a more hawkish tone to the QIR and Press conference will have a larger (positive) impact on GBP than a dovish one. For while the BoE may feel the need to push back on rate hike expectations (markets continue to price in a near-50% chance that the BoE will hike by year-end), we doubt the markets will be persuaded to price in the possibility of renewed policy easing.’

‘We continue to expect GBP to respect its current ranges until greater clarity on the Brexit deal manifests and retain a structurally higher vol bias.’

Key US Data to Be Delivered over Next Two Days Keeps USD on Soft Form

The US Dollar is on the decline this morning as investors await the key data scheduled for release over the next two days.

This afternoon sees the release of the latest ISM services/non-manufacturing composite index for July, which is expected to weaken slightly from 57.4 to 57.

Hugely-influential non-farm payrolls figures for July are set for release tomorrow, with job creation in the private sector expected to have slowed from 222,000 to a still-strong 180,000.

This is expected to push the unemployment rate down to 4.3% from 4.4%, which may help push the odds of a December interest rate hike from the Federal Reserve up past the 50% mark - currently markets place odds of 54.4% on rates remaining flat for the remainder of the year.

While at the moment markets are swiftly losing hope in another round of monetary tightening from the US Federal Reserve this year, ANZ FX Strategy Research argues that markets are being overly pessimistic on the Dollar;

‘Sentiment against the USD looks too bearish to us. The monetary policy outlook is a key driving force for currency markets. But market participants appear over-eager in chasing the next developed market central bank that could start to tighten.’

‘We remain of the view that a rebound in the USD will come once the liquidity tap starts to turn off or when risk aversion rises.’

Numerous Chances for MPC to Boost GBP Today, but Will Policymakers Deliver?

There are many possible outcomes from today’s Monetary Policy Meeting that could boost the Pound.

These include a 3-5 split in a vote for freezing rates, discussion of quantitative easing, a more hawkish outlook on monetary policy from Tenreyro than markets are expecting, continued confidence from Haldane and, of course, a surprise interest rate hike.

The Inflation Report may also provide support if GDP forecasts remain unchanged, or if comments are made about the MPC’s desire to tolerate above-target price growth for much longer.

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TAGS: Pound Dollar Forecasts