News & Analysis


After trading overnight on a weaker footing, the pound joined risk assets in rallying throughout the morning of the European session yesterday as Nancy Pelosi left Taiwan after less than 24 hours in the capital city of Taipei. However, the pound, which has been at the mercy of cross-asset price action in the absence of any idiosyncratic drivers ahead of today’s BoE meeting, soon fell to post a loss on the day against the dollar as US yields began to rally towards the end of the day. Downside in the pound may be visible again today as the Bank of England takes centre-stage for markets at 12:00 BST. While economists are closely divided on whether the Bank Rate will be raised by 25 or 50 basis points from 1.25%, money market pricing has been relatively firm in favour of a 50bp hike. Although we sit in the 25bp camp, we think the Bank’s policy decision will be perceived as underwhelming by markets irrespective of the interest rate decision. Naturally, a 25bp hike will underwhelm pricing in the August overnight interest swap, but even a 50bp hike will likely be accompanied by economic projections that underwhelm pricing of subsequent 50bp hikes in September and November. Coupled with the expectation that the MPC will become marginally more dovish in September once Michael Saunders’ term expires and our expectation that the BoE will become more sensitive to slowing growth conditions in its communications, the 2.75% year-end rate currently priced into markets will likely be revised lower following today’s meeting. If the traditional relationship between money market pricing and spot FX markets holds up, this should see further downside pressure exerted on the pound.


The single currency continued to trade on the back foot yesterday as a combination of higher front-end Treasury yields and a fresh high in German benchmark energy prices took their toll. However, despite the renewed downside, EURUSD continues to trade in the 2% range that has been in place since July 19th. Today, the focus for eurozone economists rests on the ECB’s economic bulletin, which will be published at 09:00 BST.


Amid news that Nancy Pelosi was leaving Taiwan, risk assets posted a mild retracement against the dollar. However, moves throughout the day were fairly limited ahead of the release of July’s final US services PMI at 14:45 BST. Although still sitting in contractionary territory, the upwards revision from the flash print to 47.3 set the tone for services data as it was followed by a stronger-than-expected print in the ISM services index for July and stronger factory orders for June at 15:00 BST. At 56.7, the ISM services index rose 1.4 points from June’s reading, defying both expectations and the signal provided by the July PMI. With the ISM measure held in higher regard in North America, the strong beat in the data prompted another rally in front-end bond yields as markets returned to pricing more hawkish Fed expectations again. In money markets, the contract for September’s Fed meeting soon priced a 50% probability of a 75bp hike. The dollar surged in response to the more hawkish pricing in US rates, with the largest gain recorded against the yield sensitive Japanese yen. The adjustments in US money market pricing was compounded by further hawkish commentary from Fed officials, who are all showing more visible concerns over the inflation outlook than Chair Powell at last week’s press conference. Despite markets taking the latest commentary as a sign that 75 basis points may be on the table, the easier trade is pricing in a higher year-end rate as hawkish officials, such as Daly, suggest 50bp at the next meeting is still the most likely option. Today, the economic calendar is sparse for the dollar, but the greenback continues to trade on a stronger footing heading into the European open.


The Canadian dollar outperformed the bulk of the G10 currency board yesterday due to two factors. Firstly, the positive beat in the US July ISM services data had a similar impact on front-end Canadian bond yields relative to front-end Treasuries. Secondly, OPEC’s latest decision to increase supplies underwhelmed expectations. Not only did the cartel agree on increasing production by just 100k barrels per day, but the production increase will also be split proportionally among members. With most exporting nations pumping close to capacity, this suggests that the actual output increase will be far less. While oil benchmarks ultimately fell on the day due to the tightening in global financial conditions due to higher bond yields, the decision by OPEC suggests a structural shortfall in oil output will continue to keep oil prices elevated.



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