BoE – A Dovish Hike or Full Steam Ahead?

Market Drivers August 2, 2018
UK PMI Construction beats
All eyes on BoE
Nikkei -1.03% Dax -1.63%
Oil $68/bbl
Gold $1218/oz.
Bitcoin $7600

Europe and Asia:
GBP UK PMI Construction 55.8 vs. 52.8
EUR EZ PPI 3.6% vs. 3.5%

North America
GBP BOE 7:00
GBP UK Inflation Report 7:30
USD weekly Jobless 8:30

The dollar was bid higher in lackluster Asian and early European trade with the dollar index inching towards the key 95.00 level.

Although the buck was higher against most of the majors it struggled against the yen with USDJPY drifting towards the 111.50 level in morning London dealing. The pair actually sold off in the wake of yesterday’s FOMC statement as the tone was judged not “hawkish enough”. The move has been further complicated by the announcement from Trump Administration that it is considering increasing tariffs on Chinese goods to 25% from 10% initially proposed.

In any case the positive economic and monetary background is being offset by trade concerns in USDJPY, but against all other majors, the relative strength in US yields is starting to exert an impact with EURUSD sinking towards 1.1600 level and cable trading below 1.3100.

With US calendar quiet today, all eyes will be on BOE as the UK central bank is expected to raise rates by 25bps for the first time since November of last year. UK data continues to muddle along at a modest expansionary pace and today’s UK PMI Construction PMI report even beat to the upside rising to 55.8 versus 52.8, but the concern for UK monetary officials is the prospect of a chaotic hard Brexit as negotiations with EU remain bogged down.

That why the focus of the market will be on Governor Carney’s remarks post announcement with traders wary of a “dovish” hike which would suggest that BoE will remain in hold for a considerable period of time as it assesses the progress on the political front. Such a dovish one and done affair could actually sent cable lower to a retest of the 1.3000 level – but unless BoE shocks and holds off on a hike completely, the pair should find support at that level given the improved short-term interest rate structure.

Although it’s unlikely, given Mr, Carney’s generally careful nature, the BOE Governor could shrug off the political concerns and simply focus on the economic issues at hand in which case cable could push towards key resistance of 1.3250 as the market will begin to assume that BoE wants to normalize policy in earnest.