Sterling focused on Bank of England announcement

USD

The dollar gained on Wednesday as business activity in the U.S. services sector showed an expansion in July from June.

According to the data, ISM Services appreciated to 56.7 from 55.3 in June, surpassing market forecasts of 53.7.

The data was supportive for the dollar which has faced selling pressure over the last week as investors have begun placing bets that the Federal Reserve could soon opt to a slower pace of tightening in light of recent slowing data.

EUR

The Euro fell against both the dollar and sterling, as Retail Sales data fell from 0.4% in May to show a contraction of -3.7% for June – below expectations of a -1.7% contraction.

The fall in Retail Sales was widely expected by markets given that German Retail Sales showed a contraction of -8.8% earlier in the week. The data suggests that consumers in Europe are now cutting back on spending due to concerns regarding the deteriorating economic conditions in the Eurozone.

GBP

Today the Bank of England will be the main focus for sterling.

The monetary policy committee are expected to hike interest rates but to which degree remains highly uncertain.

Currently, markets have fully priced in a 50 basis points hike, however, some economists aren’t convinced and have suggested the Bank of England may opt for a slower incremental hike of 25 basis points.

With 50 basis points fully priced in, the bar is already set high for sterling leaving the British currency vulnerable if the Bank of England under-delivers. In typical “buy the rumour, sell the fact” fashion sterling could fall on a 50 basis points hike if the Bank of England adopt a cautious tone and downgrade inflation and growth forecasts.

Economic calendar

12:00 – GBP – BoE interest rate decision expected to lift the interest rate to 1.75% from 1.25%
12:30 – BoE Governor Bailey speech
13:30 – USD – initial jobless claims (Jul 29) expected to rise to 259k from 256k