Will BoE Hike Rates?

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Market Drivers August 3, 2017
Australian trade misses
UK PMI Services beats
Nikkei -0.25% Dax -0.39%
Oil $50/bbl
Gold $1262/oz.

Europe and Asia:
AUD Au Tarde 800M vs. 1.8B
EUR PMI Composite 55.7 vs. 55.8
EUR Retail Sales 3.1% vs. 2.6%
GBP PMI Services 51.9 vs. 54.9

North America:
GBP UK Bank of England decision
USD ISM Non Manufacturing

FX markets were generally quiet in Asian and early European trade with most of the major hovering near their NY closing levels. Cable was mildly bid ahead of an important BoE meeting at 1100 GMT today that has created a lot speculation in the market about the extent of central bank desire to tighten monetary policy.

UK is the only G-7 member that is experiencing serious inflation pressures as a result of Brexit which slashed exchange rate values by more than 20% in a year. With inflation running at 3% several MPC members have expressed the desire to begin normalizing policy by hiking rates by 25bp. Members are keen to control price pressures despite the fact that growth in UK economy has been subpar with broader EZ growth outpacing UK this year.

So far only 2 members of the MPC have voted for an outright hike, the Andy Haldane – the BoE economist – has made a serious of hawkish statements over the past month and the market anticipates that he will join the yes column, tilting the odds further towards tightening. Some analysts such as Nomura are even suggesting that the BoE will shock the market with a hike today in order to reign in inflation expectations and offer the MPC more room to maneuver down the road.

Although it is a wildly out of consensus view, it may not be out of the realm of possibility as the pressure of the upcoming Brexit negotiations may make a rate hike now much more palatable than later. If BoE does surprise the market cable could easily jump 100 pips in response and may eventually trade towards it long term resistance level of 1.3500. Even if the hike is not in the offing today a hawkish tilt by the BoE could push cable higher as it remains well bid at the 1.3200 level.

Later in North American trade, the focus will shift to ISM Non-Manufacturing report with market looking for a steady read of 57 versus 57.4 the month prior. The most important data point from the report will be the employment sub-component result which is expected to come in at 56.5 versus 55.8. ISM Non-Manufacturing employment data is generally considered the best forecaster of the NFP release due this Friday, so if the data beat to the upside USDJPY is very likely to make another run at 111.00 level and hold the bid at that figure.

Boris Schlossberg
Managing Director

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