Pound Volatile on BoE Decision
UK Services Purchasing Managers Index services index edged up to a 7-year high of 61.0 and the composite output index reading hit 60.7. Companies are optimistic for the effect of the economic reopening and the strong upward pressure on prices continues.
As expected the Bank of England held interest rates and there was no change to the asset-purchase programme, although chief economist Andy Haldane was the sole voice calling for a cut in purchases.The Pound rallied after initial losses after around the meeting. The 2021 GDP growth forecast was revised sharply higher to 7.25%, although the 2022 forecast was revised down slightly. The inflation forecast for the short-term was increased, but the bank still expects that to be temporary, and the bank remains very cautious in raising interest rates. Following the meeting Sterling trading was choppy as the rhetoric used was not deemed positive enough to provide currency support.
The Pound failed to hold above 1.3900 to the Dollar while the Euro strengthened to highs of 1.1495 before a limited correction. The Scottish election results might not appear in trading hours today. Sterling posted limited net gains to trade above 1.3900 to the dollar with the Euro around 1.1535.
US initial jobless claims declined to 498,000 in the latest week from a revised 590,000 the previous week and below consensus forecasts of 540,000 while continuing claims increased slightly to 3.69mn from 3.65mn previously. The data maintained expectations of a strong labour market, but the dollar failed to benefit given increased conviction that the Federal Reserve (Fed) would not adjust monetary policy.
Given increased inflation fears, the dollar was undermined by persistently negative real interest rates. Commodity currencies posted only limited gains, but the dollar index dipped to 1-week lows.
Reaction to the latest employment data will be watched closely today with expectations of a strong report fuelled by news that President Biden would hold a press conference after the release. Expectations of negative real interest rates continued to sap dollar support this morning.
The Euro is currently picking up bids around the 1.2055 mark against the Dollar, while heading into Friday’s European session. In doing so and typical pre-NFP trading, markets trade cautiously after rising the most in two weeks the previous day.
On Thursday, the US and the EU agreed to back the waiver of the coronavirus vaccine patent protections. The move triggered market optimism as it will speed up vaccinations, especially important for the bloc which has been struggling to fasten the inoculations.
Data to watch
11:00 – EUR – ECB President Lagarde Speaks
12:15 – GBP – MPC Member Broadbent Speaks
13:30 – USD – Average Hourly Earnings
13:30 – USD – Non-Farm Employment Change
13:30 – USD – Unemployment Rate