Big Week For Sterling And Dollar

Ready for Super Thursday

This week’s movements are crucial for both sterling and the US dollar. Thursday’s run of announcements from the Bank of England are set to give GBP volatility a boost as the market waits to see whether members of the Monetary Policy Committee believe the going to be fair enough to allow for higher interest rates in the UK. As many as 3 of the 9 committee members could vote for a hike.

The interesting thing about Thursday is that while normally we would have a policy decision and then wait a fortnight for the minutes, from now on we will get both at the same time. And as it’s August, this month’s Quarterly Inflation Report will also be released at exactly the same time. The cherry on top will be a press conference at 12.45pm from Governor Mark Carney to explain it all.

Broadly I am expecting that the announcements will be GBP positive with improving revisions to wages, spending and productivity measures. More analysis of these announcements will be in this afternoon’s weekly Sterling Update.

Wages the key for a September hike in the US

Likewise, Friday’s payrolls announcement is being seen as a pretty binary decision on whether the Federal Reserve will decide to increase interest rates at its meeting in September. Last week’s Employment Cost Index, an index that measures the increase in spending on the labour force (i.e. wages), was poor and caused a broad selloff on Friday afternoon. Despite this I am still looking for normalisation to begin in September. Should Friday’s payrolls report show another +200k increase in jobs, a strengthening in unemployment and a pick-up in wages, then traders will reprice in Fed action in September. Swaps markets are pricing in a less than 40% chance of a hike at the September meeting and therefore gives us the belief that USD has further upside to come.

China unable to manufacture the recovery

Over the weekend China’s manufacturing PMI reading delivered nothing but stagnation, lending credence to the belief that China’s economy is nowhere near the government’s 7% growth target for 2015. The official PMI hit 50.0 – with anything above that number viewed as expansion and below it as contraction – while a smaller, more private measure of the Chinese manufacturing sector posted a figure of 47.8.

With China’s release out of the way we focus on Europe and the US. Italy’s number is due at 08.45, France at 08.50, Germany at 08.55, and the Eurozone wide measure at 09.00 with the UK number due at 09.30. Once again, it will be interesting to see whether PMIs in Europe have rebounded in July following the announcement of a tentative accord between Greece and its creditors. The US’s ISM number will be released at 15.00 BST.

Aussies to hold

Overnight tonight we have the Reserve Bank of Australia’s latest policy decision. July saw policy held at 2.00% and I would expect the same thing to happen overnight. Monetary conditions have weakened as a result of the weaker AUD and while lower inflation and lower commodity prices may warrant a rate cut, higher house prices and fears of bubble should stay the RBA’s hand. The announcement is due at 04.30 tomorrow morning.

Have a great day.