- GBP capped by the upcoming BoE interest rate decision, due at 13:00 CEST
- The Brexit vote consequences still need to be appraised but the BoE is expected to cut its bank rate by a quarter point to 0.25% in order to boost the UK economy
- The BoE may decide to cut its bank rate but such a move is premature in our view
- We believe that the BoE would prefer to wait for its August meeting before cutting rates
- NZDUSD: Fundamentals do not justify further Kiwi strength, especially in light of another rate cut from the RBNZ and ever-elevated global uncertainty
The pound sterling reversed yesterday’s losses against the US dollar, finding a strong support at around 1.3121 (low from June 27th), as Theresa May unveiled her new government. GBP/USD bounced 0.68% to 1.3236 from 1.3147. However, we think that the pound is capped by the upcoming BoE interest rate decision, due at CEST 13:00, as the market expects a rate cut of 0.25%, which would bring the benchmark rate down to 0.25%. Almost three weeks after the Brexit vote, the market also expects an update on the BoE’s thinking as the first side effects are being felt. Since a rate cut is almost completely priced in, the market will be more sensitive to the wording and tone used by Mark Carney during the press conference.
Yann Quelenn, market analyst: The Brexit vote’s consequences still have to be appraised but the BoE, which has repeated many times that it is awaiting further referendum developments, is expected to cut its bank rate by a quarter point to 0.25% in order to boost the UK economy. This would be the first rate cut in more than seven years.
In our view, market expectations concerning a rate cut may be too strong. Since the referendum, there has been a lack of economic data that would actually help the BoE to make a proper decision. The BoE may still decide to cut its bank rate but we feel that such a move is premature. Nevertheless, what is clear is that the Bank rate should stay low for quite some time. The inflation target of 2% by the end of 2017 still looks attainable and a rate cut would add more upside pressures on consumer prices. The pound has reached a 31-year low and while exports are clearly benefiting from that weakness, the impact on inflation still has to be correctly appraised. We therefore have the feeling that the BoE would prefer to wait for its August meeting before cutting rates. The UK bank rate has been on hold for so long that such haste is difficult to understand.” ---
The New Zealand dollar suffered a sharp sell-off in Asia as the RBNZ announced it will issue a brief update on its economic assessment on Thursday 21st. Even though the institution made it clear there will be no interest rate decision, the market expects the central bank will prepare the ground for later this summer, most likely at its next meeting on August 10th. After dropping 4.50% immediately after the Brexit vote, the Kiwi has been rallying strongly over the last couple of weeks, repeatedly testing the 0.73 resistance against the US dollar but was unable to break it. We anticipate NZD/USD will test the bottom of its uptrend channel as the Kiwi loses momentum. Indeed, the fundamentals do not justify further Kiwi strength, especially in light of another rate cut from the RBNZ and against the backdrop of ever-elevated global uncertainty.
The Australian jobs report came in roughly in line with expectations with the unemployment rate rising slightly to 5.8% in June from 5.7% in the previous month (5.8% median forecast), mostly due to an increase in the participation rate, which an up-tick of 0.1% to 64.9%. However, full-time employment surprised massively to the upside as the Aussie economy added 38.4k full-time jobs, while 30.6k part-time jobs disappeared. This is indeed good news for the Aussie economy; however given the very weak data from the job market over the last few months, it would appear that this result is simply a transfer from part-time to full-time jobs, signalling at the very most that employers are confident enough about the medium-term outlook, but it doesn’t tell us more than that. Initially, AUD/USD rose 0.40% to 0.7639 but quickly returned to 0.7625.
Today traders will be watching industrial production and current accounts from Turkey; mining and gold production from South Africa; BoE’s interest rate and asset purchase decision from the UK; initial jobless claims and PPI from the US; Fed’s Lockhart and George will also speak today.