Markets await Bank of England announcement

GBP

The pound has started August strongly posting gains against all major currencies but could fall if the Bank of England disappoints markets on Thursday. Money markets have priced in a 50 basis points rise as the bank looks to fight rising inflation which is currently at record highs. On the downside, there are some economists and major investment banks downplaying a 50 basis point rise and feel the MPC could disappoint markets and deliver a 25 basis point rise. With mixed economic data published, a worsening economic outlook and rising living costs, some analysts think the Bank of England could hold back and take a wait and see approach.

The pound is at risk of a steep correction even if a 50 basis point rise is delivered. Reasoning behind this is because growth and inflation forecasts will be lowered but a slowdown in rate hiking could be hinted at meaning the Bank of England will not take an aggressive stance with rising interest rates at the next few cycles. The dovish tone could hurt the pound but this is dependent on the comments made by governor Bailey.

USD

The dollar surged on Tuesday and clung onto gains in a choppy trading session as Federal Reserve officials talked up the potential for further aggressive interest rate hikes. A trio of FED members remain resolute and “completely united” on getting U.S. interest rates up to a level that will more significantly curb economic activity and put a dent in the highest inflation since the 1980s. The dollar rose as a result of comments made and recovered after a four day losing streak.

Furthermore the dollar benefitted from safe haven flow as US house representative Nancy Pelosi arrived in Taiwan, China condemned the highest-level U.S. visit in 25 years as a threat to peace and stability in the Taiwan Strait.

Her arrival prompted a furious response from China at a time when international tensions already are elevated by Russia’s invasion of Ukraine. China considers Taiwan part of its territory and has never renounced using force to bring it under its control. The United States warned China against using the visit as a pretext for military action against Taiwan.

Key announcements

9:00 – EUR – Final services PMI – Set to remain unchanged at 50.6
9:30 – GBP – Final services PMI – Set to remain unchanged at 53.3
10:00 – EUR – Retail sales m/m – Forecast at 0.0% from previous 0.2%
2:45 – USD – Final services PMI – Set to remain unchanged at 47
3:00 – USD – ISM services PMI – Forecast at 53.5 from previous 55.3