03/08/2017 - Pound At 11-Month High Against Dollar

GBP

Sterling traded at its highest in almost 11 months against a broadly weaker dollar on Wednesday, as a two-day Bank of England meeting that should provide investors with clues on whether interest rates could be hiked in coming months got underway. A purchasing managers' index (PMI) survey showed growth in Britain's construction industry tumbled to an 11-month low in July. The index printed at 51.9 against previous of 54.8 and had little impact on the currency.

Thursday's PMI for Britain's dominant services sector will be followed by a policy decision, the quarterly Inflation Report, and then a press conference with Governor Mark Carney. Although analysts agreed that the construction numbers did not matter too much for sterling, they nevertheless were the latest in a run of weaker data from the British economy, which got off to a sluggish start to the year with an annualised growth rate of just 1 percent.

That softer data - along with deep uncertainty about the way Brexit will play out and its impact on the economy - has cooled speculation that the BoE is poised to lift rates from record lows, which followed hawkish remarks by policymakers at the bank in recent months. At the last meeting, three out of eight policymakers voted to hike rates immediately. But one of those - Kristin Forbes - has now departed and has been replaced by a rate-setter who has in her previous roles appeared more dovish, Silvana Tenreyro.

USD

The US dollar came under further pressure stemming from what we have seen for the majority of this year. The dollar's weakness this year has been fuelled by a steady unwinding of expectations of optimism about U.S. President Donald Trump's stimulus plans and falling hopes to the extent of a Federal Reserve policy increase in the coming months. Expectations of a U.S. rate increase at its September meeting has all but evaporated from the market compared to a 20 percent probability a month earlier; with Fed member Mester saying that she does not want to ‘over-react’ to weak inflation when more data will arrive before the September FOMC meeting. 

Nevertheless, recent data has been encouraging. Last week's data showed the U.S. economy accelerated in the second quarter with market expectations focussed on jobs data this week. In contrast, yesterday’s ADP figure which has always been billed as a very accurate indicator of the Non-Farm Payroll figure was in fact printed lower than both forecast and previous at 178K, thus adding further concern on the US economy and dampening hopes of a US interest rate hike before the end of the calendar year.

Key Announcements 

12.00 – GBP – BOE Inflation Report

12.00 – GBP – MPC Official Bank Rate Votes; Forecast 2-0-6 against previous of 3-0-5

12.00 – GBP – Official Bank Rate; No change from previous of 0.25%

12.30 – GBP – BOE Governor Carney Speaks

13.30 – USD – Unemployment Claims; Forecast at 242K against previous of 244K

15.00 – USD – ISM Non-Manufacturing PMI; Forecast same as previous as 54.2