Thursday, August 2, 2018

Bank of England: to hike or not to hike, that's the question

Tags
  • Dollar
  • Euro
  • Pound
  • Stocks
  • Bank of England

MORNING BRIEFING

With the Federal Reserve meeting behind us, our focus now swifts to the Bank of England interest rate decision due to be released today. The stakes are high for the British central bank to decide whether they should pull the trigger now or risk allowing inflation to continue running above target. At the same time, the Dollar is seeing more strength on the back of Fed's decision yesterday while equities continue to trade in the red.

Starting with the major event of the day, the Bank of England will announce their decision on interest rates in the afternoon and the odds are that they will go ahead and hike rates by 0.25%. Even though this is the most likely scenario, with odds in favor of raising at 91% this morning, the Pound is not enjoying a strong performance going into the event. Prices are hovering around the 1.31 mark at this time and investors clearly don't want to commit to any long positions beforehand.

Pound's under-performance can be understood if one takes a look at the state of the domestic economy and the progress - or rather lack thereof - in the Brexit negotiations. The UK economy shows significant signs of weakness with manufacturing activity printing lower yesterday, wage growth not picking up, retail sales disappointing and no significant progress in the Brexit talks even though PM May took over the leading role in the negotiations. Having said that though, the BoE is still forced to take action in order to arrest inflation that runs above the 2% target.

And there lies the opportunity today: even though the health of the UK market doesn't warrant a rate hike, we believe that the BoE will go ahead and raise rates but the key question is how bullish or not Carney will sound during his press conference. If indeed a hike takes place, Cable will move to towards 1.32 but whether gains will hold depends on Carney's tone: if he's optimistic and allows hope for more moves then the rally will hold and possible extend to 1.33; if he sounds reserved and hints on a “one and done” move then the Pound will quickly shed its gains and reverse towards 1.31 again. Finally, in the off chance that we see no hikes, the UK currency will collapse with 1.30 the first area of focus.

Turning our attention to the Dollar, the US currency is gaining post-FOMC and ahead of the NFPs on Friday. The Fed decision didn't provide anything new which means that the central bank's policy remains “steady as she goes” allowing room for traders to debate on whether we will see 1 or 2 hikes by the end of the year. The focus will now swift on the NFPs due tomorrow and with expectations set for a positive printing the Dollar should continue to be in demand. Dollar/Yen dropped below 112 but if momentum picks up again we should see a retest of this resistance level.

Equities in Asia are trading deep below water as President Trump's intention to escalate tariffs against China is dampening investors' sentiment. As we discussed last month, a $200 billion salvo of levies on Chinese imports would be a considerable step-up in the trade dispute between US and China and would start to seriously threaten global growth. As such, the European and US markets are pointing towards a bearish opening bell taking their cue from the Asian bourses. On that note, we should highlight that the FTSE 100 and the DAX are now threatening to break below their upwards trendlines and this could trigger further selling interest.

MARKET EVENTS TO WATCH

  • Bank of England Bank Rate Decision - 3pm
  • U.S. Durable Goods Orders - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Market Research

 
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