As expected, the BoE kept monetary policy on hold with interest rates at the historically low levels of 0.1%. This meant that the quarterly inflation report and the tone of the central bank would drive movement in GBP.
Quarterly inflation report
The central bank presented an improved outlook in the quarterly inflation report for this year. GDP for 2020 was upwardly revised to -9.5% (-14% previously), with a smaller rebound in 2021 of +9% vs +15%. BoE considered that the recovery in the UK has been earlier and more rapid than initially expected. However, the bank also highlighted that risks to activity are skewed to the downside as the government unwinds job support.
Inflation is expected to be more subdued this year +0.25% vs 0.6% previously forecast and could turn negative temporarily, although the rebound next year is expected to be stronger. The central bank was clear that there will be no tightening of policy until a sustained move towards 2% inflation is seen. According to the BoE’s forecasts that won’t be within the next three years.
Negative rates
Much to the pound’s delight not only were there no dissenters towards negative rates but the central bank also said that negative rates at this time could be a less effective tool to boost the economy
Conclusion
The BoE was considerably more upbeat about the recovery than had been expected. Upwardly revised growth forecasts, a more rapid recovery than initially feared and no tilting towards negative rates at this time has sent GBP surging towards $1.32.
USD struggles
The same concerns that dogged the USD in July, resulting in its worst monthly performance in a decade, have unsurprisingly dragged into August. The greenback trades lower amid concerns that rising coronavirus cases will result in the US economic recovery lagging behind other countries. Whilst data has broadly been supportive, the picture surrounding the labor market is darkening rapidly.
- The ADP payroll report showed that growth slowed sharply in July with 162k vs expectations of 1 million.
- The ISM non-manufacturing PMI was upbeat with new orders hitting a record high. However, the employment sub-component weakened considerably.
- Initial jobless claims today are also expected to add to mounting evidence that the recovery in the US labor market has stalled.
It will take a very impressive number from tomorrow’s nonfarm payroll to turn the USD around. Given the lead indicators this week, a strong NFP is looking highly unlikely.
GBP/USD Chart
