Global Themes

Pound rebounds on BOE surprise
- BOE vote strengthens the pound
- PMI in focus
- Dollar down on profit taking
- Inflation to spur BOC rate rise?
- Commodity-based currencies eye OPEC meeting

GBP

BOE vote strengthens the pound
Sterling was given a welcome boost yesterday following the Bank of England’s (BOE) monetary policy decision. Expectations of a rate rise at its next meeting in August were bolstered by an extra member of the Monetary Policy Committee (MPC), voting for a rate rise. Chief economist Andy Haldane surprised market participants by joining the two previous dissenters, shifting the scales from 7-2 to 6-3 in favour of keeping rates unchanged at 0.5%. Widespread demand for the British Pound as a result of this so called “hawkish-hold” allowed Sterling to recapture the €1.14 handle against the Euro. The more aggressive move came about in GBP/USD, which propelled over 150 pips higher from the new 7-month low of $1.3099, clocked ahead of the BOE event.

The pound continues to extend its climb against the US Dollar this morning, but this is mainly based on dollar weakness across the board. GBP/USD could look to test the $1.33 level today, but risks of a sharp snap reversal cannot be ruled out. Around $1.33 has proved an area of resistance in the past, and it may take another Sterling-positive or dollar-negative catalyst to overcome this barrier.

The probability of a UK rate rise in August is now above 50% according to Reuters, but the BOE have been clear that a hike is very much dependent on economic data. This could scupper any further Sterling gains if the multitude of data between now and August fails to inspire policymakers.

EUR

PMI in focus
This week the Euro has been hinged on the European Union (EU) forum where European Central Bank president Mario Draghi reconfirmed the banks stance on quantitative easing and interest rates from last weeks meeting. With no surprising comments to market participants, the Euro has been at the mercy of other currency movements. At 9:00am manufacturing and services data for the month of June will be released for the Eurozone, both manufacturing and services are expected to fall from 55.5 to 50.0 and 53.8 to 53.7 respectively. A number above forecast could drive Euro strength and see GBP/EUR retrace back under €1.14.

Italian Prime Minister Giuseppe Conte said yesterday a draft European Union (EU) accord on migration had been withdrawn after he clashed with German Chancellor Angela Merkel over an issue that is splitting Europe. The migration issue for the EU has yet to impact the Euro, however if this continues we could see Euro weakness as the EU divides on the subject.

USD

Dollar down on profit taking
The USD looks to be taking a breather from its positive run of late, with GBP/USD and EUR/USD jumping higher over the past 24 hours. Diminishing trade tensions between the US and China has actually weakened the dollar as risk-on sentiment appears to have re-emerged in the market. The recent dollar rally to 11-month peaks against a basket of currencies has been met with a wave of profit taking by investors, essentially meaning closing positions out and selling the dollar, which is why it has weakened.

Today, attention shifts to both services and manufacturing PMI’s released at 2:45pm. Manufacturing PMI for June is expected a tick higher at 56.5 from 56.4 but services PMI is forecast to fall to 56.4 from 56.8.

An upside surprise on the US data today could cap any further gains on EUR/USD, but if the data disappoints, investors may just continue selling the dollar into the weekend.

Inflation

Inflation to spur BOC rate rise?
Today at 1:30pm will see the release of the Canadian inflation figure for the month of May. Inflation is expected to rise y/y but stay flat m/m. The y/y number is expected to rise from 2.2% to 2.5%, while the m/m number is expected to stay flat at 0.3%. If inflation continues to grow, this could add further pressure on the Bank of Canada (BOC) to raise interest rates in its next meeting on the 11th of July, and could strengthen the CAD as a result.

OPEC

Commodity-based currencies eye OPEC meeting
The Organization of Petroleum Exporting Countries (OPEC) will also meet today to decide on their output strategy after calls from the US, China and India to cool down the recent surge in oil prices by increasing supply. If OPEC reach an agreement to pump more oil, prices will likely decrease, which could have a negative impact on commodity-based currencies like the NOK and CAD. However, Iran have voiced no desire to increase production and if no agreement is formalised, oil prices could continue rallying higher.




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