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03 Aug 2017
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A dovish Bank of England hits the pound

US Dollar

Expected Range 1.3140 to 1.3250

So it was another disappointing day of data releases yesterday for the US dollar as ISM non-manufacturing fell more than anticipated suggesting that there is a slowdown in the service sector. This adds to the argument that today is likely to be a poor day for non-farm payroll figures as there has also been a drop in private employment, a slight rise in continued unemployment claims and consumer sentiment is at a nine month low. NFP will be released this afternoon and it is important to remember that it is not always the headline figure that is most significant, but rather the unemployment rate and wage growth.

More importantly for the pound was yesterday’s decision from the Bank of England to leave its interest rates on hold and at the record low of 0.25%. At the start of the day the pound had hit an 11-month high against the USD, but GBP/USD soon tanked by around 1% as the market was disappointed that no one joined dissenters Michael Saunders and Ian McCafferty in voting for a hike. Back in June, Andy Haldane, who is the bank’s Chief Economist, had stated that given the strength in the data releases at the time, an interest rate hike in the second half of the year would be prudent. However, with Q2 GDP disappointing last week, it would appear that this was enough to deter Haldane. More significantly was the dovish outlook the bank had towards the UK economy, cutting wage growth forecasts to 3% from 3.5% for 2018. Growth was also revised lower from both 2017 and 2018 as Governor Mark Carney warned that Brexit was causing economic problems as businesses are reluctant to make decisions and commit to investment. Moving forward there is definitely a lot of uncertainty surrounding the pound. The Eurozone is going from strength to strength as the two economies diverge and with the Federal Reserve voting once again on their own interest rates before the Bank of England does, sterling’s performance moving towards the end of the year could well be determined from events elsewhere.

Euro

Expected Range 1.1060 to 1.1150

After such a strong start to the year, the Eurozone’s composite PMI which measures activity at factories and in the service sector dropped back slightly for the month of July. There was still considerable growth but not as strong as the results in the first half of the year. The euro still had a great day as it strengthened over 1% against the pound following the news from the Bank of England. 

Australian Dollar

Expected Range 1.6500 to 1.6650

Overnight we had the latest RBA statement on monetary policy. The biggest message from the central bank was that more strengthening in the Aussie dollar would cause economic growth and inflation to fall. This morning the Aussie dollar has opened up stronger. Also, growth forecasts for the end of the year were bought in slightly but this is made on the assumption that AUD/USD remains at 0.80 (IB).

New Zealand Dollar

Expected Range 1.7660 to 1.7880

It was a quiet day for the Kiwi Dollar with no data or comments released. Movements in GBP/NZD were all driven by events at Threadneedle Street. However it will be a bigger week next week for the Kiwi with inflation scheduled for release early on Monday, before the RBNZ cash rate decision and statement on Wednesday.