The pound lived up to our expectations around yesterday’s Bank of England meeting, even while our call for a 25bp hike didn’t. As laid out in yesterday’s report, we expected the pound to weaken irrespective of the BoE’s rate decision as the accompanying forecasts and communications were likely to paint a more dire economic outlook and a lower rate profile relative to market pricing. Purely on an inflation front, the Bank’s four indicative scenarios, which look at a spectrum of energy market and interest rate permutations, saw inflation falling below the 2% target over the two-to-three year horizon. Under its benchmark projections, the Bank went as far as saying that headline inflation would be just 0.8% in 2025 under the current market implied path for UK interest rates, despite spiking to 13.3% in Q4 of this year following a 75% increase in the Ofgem price cap. This is the lowest three-year projection in the Bank’s modern history. Doubling down on the message of a hard path ahead, the Bank also stated that they expect a protracted recession over the coming six quarters as the economy buckles under the pressure of higher inflation and tighter monetary policy. Ultimately, the set of projections that were released alongside yesterday’s 50bp rate announcement saw the UK Gilt curve drop, with the 2Y-10Y portion of the curve threatening to invert–a traditional recession indicator that signals a loosening in policy in the coming months. The reaction in bond markets outweighed drove the pound lower, with GBPUSD falling over a percentage point shortly after the Bank’s announcement. While the pound soon retraced the move on a softer broad dollar, the alarm bells from the BoE reaffirm our expectation that the GBPUSD will remain soft in the 1.20 region against the dollar in the near-term, despite our adjusted expectation for the Bank to continue raising rates to a terminal rate of 2.5% this year. Further GBP downside may be exhibited today should the US jobs data at 13:30 BST print on the stronger side. Just prior to the release, markets will pay close attention to what BoE Chief Economist Huw Pill has to say at 12:15BST given the precarious economic outlook painted by the BoE’s forecasts yesterday.
Price action in the single currency was largely dictated by an improved risk environment in equity benchmarks, with the Euro Stoxx index trading 0.6% higher on the day. This occurred in spite of a continued deterioration in Europe’s energy benchmarks; a theme we ultimately think will de-anchor the euro from the mid-point of its current trading range. Today, the euro’s fortunes heading into the weekend will be driven by the outcome in US payrolls and the corresponding Treasury market reaction. A substantial slip in the net payrolls figure will likely provide some support for the single currency at current levels, but upside is likely to be capped by still elevated wage growth data which is a lagged indicator of the health of the US labour market.
The US dollar broadly fell against the G10 currency board yesterday in the run-up to today’s jobs data, with very little in the way of drivers beyond an improvement in the risk tone driven by equity markets following robust corporate earnings figures. This morning, the dollar is back trading on a firmer footing, however, as the situation in Taiwan remains tentative despite signs of mild de-escalation. Contributing to the dollar’s partial retracement is the expectation that the US jobs market will continue to keep adding employees, albeit at a slowing pace. With the Fed’s September meeting still a toss-up for markets following the Fed’s mixed communications over the past week, Nonfarm payrolls will likely prove a better guide for market expectations, especially amid the Fed’s new data-dependent phase that rests heavily on labour market developments defying calls that the US economy is in recession. The risks leading into today’s payrolls data at 13:30 BST are finely balanced for the dollar. Continued strength in the US labour market despite corporate communications suggest a hiring slowdown is on the horizon will likely embolden the markets hawkish priors. However, any slip in either the net payrolls or average hourly earnings figure will likely see the doves win the argument in US bond markets. We will also be paying close attention to any revision in June’s payrolls data following three consecutive months of downwards revisions. Potentially muting the impact of today’s decision on FX markets is the fact that August’s payrolls report is also due out ahead of September’s Fed meeting.
USDCAD has traded in a 0.56% range from Tuesday onwards this week, with the loonie highly sensitive to broader dollar developments. Recently, the Canadian dollar has also reconnected with WTI price action as the North American oil benchmark falls below the $90 threshold for the first time since the Ukraine war. Today, the focus for CAD traders drifts back closer to home as July’s Labour Force Survey data is released alongside US payrolls at 13:30 BST. Following June’s net employment drop, which was driven by a large proportion of retirements as opposed to a loosening in labour market conditions in the core-age group, the entirety of the Canadian labour market report will be in focus. Signs of downwards pressure on wages may start to weigh on BoC expectations, but with employment expected to bounce back with a net 15k job increase, continued tightness in the labour market will likely support the loonie in current ranges.