Eyes on Bank of England Meeting Today

The July manufacturing PMI this morning will provide a temporary distraction ahead of the BoE MPC announcement at midday. The manufacturing PMI has risen over the past four consecutive months and the market is expecting a further rise to 52.8. An upside surprise to today’s number would be positive for GBP but uncertainties surrounding the BoE announcement may limit any GBP gains. There is a slight outside chance the BoE may decide to announce additional stimulus measures today. However even if it did this, any proposed changes in policy may still be delivered with next week’s announcement on forward guidance at the Quarterly Inflation Report. In the absence of any change today, the MPC will likely issue a statement, reiterating the dovish tone from July’s meeting. Should there be little change in policy tone today, we could see GBP higher on market relief; however uncertainties surrounding the announcement next week will likely weigh on GBP upside.

Little is expected from the ECB today. There is little justification for the ECB to announce more stimulus at this stage; peripheral spreads remain stable, data has been decent of late and there have been improvements in confidence with broad rises in PMIs. However the market will be looking closely at Draghi’s comments at the press conference. Most of the market expect he will maintain a dovish tone, he maybe asked to provide more clarification with regards to the forward guidance.

ADP was stronger than expected, and while Q2 GDP was also better than expected this was partly offset by downward revisions to the previous quarter. The FOMC statement overnight saw minor changes, slightly more dovish than previously but still suggests QE ‘tapering’ remains likely in September. Manufacturing ISM will be of interest particularly the employment component, but in the absence of a significantly weak number we doubt it will derail market expectations of ‘tapering’. We expect the USD to remain supported ahead tomorrow’s payrolls.

About these ads
Posted in Banking, Foreign Exchange, International Payments, Money Transfers | Tagged , , , , , ,

GBP/USD at fair value?

GBP has recovered well from the sharp sell off seen in response to the weaker than expected UK production data on Tuesday. While the USD move overnight has generally been overdone, the move in GBP/USD corrects what looked like an overly aggressive sell off, and GBP/USD looks close to fair value here. The MPC’s Miles speaks today and while he is likely to reinforce his dovish stance, the fact that he is a well known dove means the GBP risk on his comments may be to the upside.

EUR/USD has tended to stick fairly closely to the path implied by forward points, so unless there is some deterioration in the credit picture in Europe, it is hard for it to gain any real traction on the downside, as there is no significant downside for 2 year Eurozone yields from here, and the upside for US yields has been capped by Bernanke for now. It is still possible that we will see a new low for the year in EUR/USD in the short term, but as with the new lows seen in GBP/USD this week, it may prove to be a time to square short positions rather than extend them. The move overnight looks overdone, with short term fair value in EUR/USD slightly below rather than above 1.30 at current yield spreads.

USD strength was corrected through the European session yesterday ahead of Bernanke, and was violently reversed in response to his comments. While the USD reaction after the FOMC minutes and Bernanke’s comments is certainly an overreaction, it is reasonable to see Bernanke’s comments as pushing back against the recent market bullishness on the USD and the potential for tighter Fed policy.

Posted in Banking, Foreign Exchange, International Payments, Money Transfers | Tagged , , , , , , ,

GBP/USD Continues to Edge Lower Along with EUR/USD

GBP/USD continued to edge lower yesterday along with EUR/USD. Today sees the release of the third estimate of Q1 GDP. Since the release of the second estimate, construction and services output for March have provided little reason to expect revisions to today’s release, and therefore will unlikely trigger much market reaction. Q1 Current Account could see some interest, but Friday’s index of services will likely garner more interest as it gives insight into prospects for Q2. GBP/USD remains vulnerable to the downside on USD moves, but GBP/USD should see decent support around the 1.5290/1.5300 area.

EUR/USD continued to edge lower despite the weaker US number yesterday. Draghi’s comments in the morning didn’t really reveal anything new, as he reiterated his dovish stance still expecting a gradual recovery by year-end. While German employment numbers and Eurozone confidence indicators this morning will see some interest, sentiment towards the USD will likely remain the key driver for the currency pair. The next area of support for EUR/USD looks to be around the 1.2940/50 area.

The third estimate of Q1 GDP saw a relatively large downward revision to 1.8% q/q saar; personal consumption data was weaker than expected. While this triggered an initial USD negative reaction, this quickly faded. The average growth over the last two quarters is the lowest we have seen since 2009, which doesn’t really provide much of compelling case for tapering of QE. However, while the Q1 GDP data was disappointing it is backward looking, and the more forward looking releases remain a key focus. Consumer confidence surveys in Q2 have been strong – with the June number far exceeding market expectations. Today’s initial jobless claims will likely draw some market attention ahead of next week’s key non-farm payrolls release.

Posted in Banking, Foreign Exchange, International Payments, Money Transfers | Tagged , , , , , , ,