Caution ahead of BoE policy announcement
There was further hawkish messaging from ECB officials with council member Kazimir opening a clear need for a 50 basis-point rate hike in September. The Euro was unable to gain support from higher yields amid concerns over the risk of a surge in peripheral yields.
The dollar continued to gain net support from expectations that the Federal Reserve will have to be more aggressive in raising interest rates to stem inflation pressure. There was further speculation that there would be a 75 basis-point rate hike at this week’s policy meeting with a notable shift in investment bank expectations.
UK labour-market data showed unemployment increased to 3.8% for the latest 3-month period. Headline average earnings growth was weaker than expected at 6.8% and underlying growth held at 4.2% which may deter aggressive Bank of England action.
Sterling was hurt by a renewed slide in risk appetite during the day, especially with fears over the UK balance of payments position and the latest GDP data continuing to sap confidence amid increased fears over the risk of UK recession. The latest trade data also undermined sentiment given on-going fears over a decline in trade volumes to the EU and the risk of a trade war with the EU. Sterling dipped sharply to lows around 1.2125 before a recovery towards 1.2200 while the Euro posted strong gains to near 1.1630 before a retreat to 1.1675.
There will be an element of caution ahead of Thursday’s Bank of England policy announcement with the potential for short covering.