GBP/USD: ahead of the Bank of England meeting


The UK services sector continued to recover, data released this morning by IHS Markit shows. The purchasing managers' index (PMI) for the UK services sector came out for July with a value of 59.6, which was better than the forecast of 57.8. The PMI was better than expected, despite a slowdown in activity growth since the end of the winter lockdown.

"More and more companies are experiencing difficulties in connection with supply disruptions and labor shortages, while the peak of implementation of deferred consumer demand has already passed", - noted in IHS Markit.

At the same time, inflation in July showed the fastest acceleration since the start of such statistics 25 years ago, being accelerated by rising wages, higher fuel prices and higher transportation costs, which, in turn, pushed up production costs.

In general, the recovery of the UK economy after its fall due to the consequences of the coronavirus can be assessed as moderately positive.

"Expectations of the UK government lifting most restrictions on international travel from Thursday also slightly improve the prospects for economic recovery", economists say.

The British pound demonstrates positive dynamics ahead of the Bank of England meeting on Thursday.

Most economists believe that the Bank of England will refrain from taking any action on the current parameters of monetary policy for the time being.

Also, at the same time (at 11:00 GMT) the Bank of England's monetary policy report will be published, containing an assessment of the economic outlook and inflation. If the tone of the report is soft, then the British stock market will receive support and the pound will decline. Conversely, the report's tough rhetoric on curbing inflation, implying an increase in interest rates in the UK, will strengthen the pound.

Market participants expect the first key rate hike in May 2022. However, the quotes of the pound and the yield on government bonds of Great Britain will rise if, following this meeting, the Bank of England strengthens expectations of a rate hike next year.

The intrigue about the future actions of the Bank of England remains, and in trading the pound and the GBP / USD pair, a lot of trading opportunities are provided during the period of publication of the bank's decision on rates.

Meanwhile, the dollar's decline also stalled after falling the previous week when the Fed ended its meeting. On Monday, the dollar was also under pressure from US macroeconomic statistics, which turned out to be worse than expected. Thus, the index of business activity in the manufacturing sector from ISM in July showed a decrease from 60.6 to 59.5 (against the forecast of 60.9). The ISM new orders index for the same period fell from 66.0 to 64.9.

Similar Markit and ISM US Services PMIs for July will be released today at 13:45 and 14:00 (GMT). If they also turn out to be worse than the forecast or the previous value (59.8 and 60.1, respectively), then the dollar will again be under pressure.

At the time of this posting, the DXY dollar index is at 92.11 mark, 108 points below its maximum reached last month.

Investors also continue to monitor the situation with the coronavirus and assess the possibility of new lockdowns.

The daily number of new Covid-19 cases exceeded 100,000 on Friday, the highest since February, according to the US Centers for Disease Control and Prevention. Most of those infected have not been vaccinated, prompting health experts to press again for more aggressive vaccinations. Leading American infectious disease expert Anthony Fauci on Sunday warned of further "pain and suffering" due to the spread of the delta strain and the persistence of a significant proportion of unvaccinated Americans.

Last week, Fed Chairman Jerome Powell noted that concerns about the spread of the delta strain prompted the central bank's decision not to rush to wind down its quantitative easing program.

If the situation with the coronavirus in the world and, above all, in the United States deteriorates, this could negatively affect economic growth and affect the Fed's policy towards its, if not mitigation, then further retention in the current extra-soft parameters, because of which the dollar may weaken.

After the meeting of the Bank of England, the attention of market participants will switch to the publication on Friday (at 12:30 GMT) of the monthly report on the number of jobs outside of agriculture in the United States, as they may affect the Fed's decision on the quantitative easing program and, consequently, the dynamics of the dollar.