From a markets points of view, yesterday's Bank of England meeting was somewhat of a disappointment. The BoE elected to hike by 0.25% with an emphasis on keeping interest rates higher for longer. There was continued references to upside risks in inflation, which leaves the possibility of another hike in September. Reading between the lines, it seems that the Bank are reluctant to stipulate they are at the end or near the end of their interest rate hike cycle as they look to monitor if inflation continues to drop. GBP weakened going into the announcement, with GBPUSD falling to the lowest since 30th June on the expectation of a more dovish tone. Given the ambiguity in the forward guidance, markets look like to have taken profits on the GBP’s recent weakness, with GBP retracing some of the losses it suffered in the morning. There remains an expectation in the money markets for the BoE to hike by 0.25% two more times this year.
USD weakened in the afternoon with PMI services numbers coming in lower than expected, suggesting weakness in the job markets as well as softer growth numbers ahead.
* Daily move - against G10 rates at 7:30am, 04.08.23
** Indicative rates - interbank rates at 7:30am, 04.08.23
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This week we’ve had very mixed figures with regards to the US job market. JOLTS data came in lower than expected, ADP numbers came in much higher and jobs component in yesterday's services PMIs came in lower. Today's numbers will hopefully give the market a clearer guide with regards to how the jobs market is performing. As ever, we look at the nonfarm payroll print, hourly earnings, and the unemployment rate in the afternoon. Data to suggest a strong jobs market will mean that USD has gained for three consecutive weeks.
So where next for GBP following the BoE meeting? Yesterday's accompanying statement cemented the GBP move lower from the recent highs following recent data suggesting inflation has started to drop in the UK. Based on this, it seems the upside potential on GBP will be limited, and seems unlikely to go back up to highs in July when markets were forecasting peak interest rates at 6.50%. Should data continue to show that inflation in the UK is dropping causing markets to price down the peak interest rate expectations, then GBP will likely decline, albeit at a slower pace.
All eyes on US job numbers today, particularly as it's used as a gauge of the strength of the US economy. As we can see below the number of additional jobs being added and wages have been steadily declining, but nothing so far anyway to suggest that the job market is loosening. So long as today's data supports this trend then thoughts on the US avoiding a recession will likely continue and support USD.
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