BOE Looks to Remain Dovish


The pound was the third best G10 currency last week as it strengthened by 1.2% versus the dollar and 0.3% against the euro. Falling Covid numbers helped to give sterling a boost, as investors regained confidence in UK economy and are no longer worried about restrictions needing to be put back in place. In total, over 85 million doses of the vaccine have now been administered across the UK. With more than 72.5% of UK adults having received two doses so far. Bank of England’s Gertjan Vlieghe said the bank should not scale back its stimulus possibly until well into 2022 because the recent rise in inflation is likely to be temporary and COVID-19 remains a threat for the economy.

The focus will be on the Bank of England meeting on Thursday with the bank unlikely to change rates, but the following press conference could cause some volatility for the pound. Only 1-2 members are likely to vote for an early end of the quantitative easing and this should not come as a surprise to markets and the guidance should be seen as neutral. The 1.40 level could be tested on cable as long as EUR/USD remains stable. The only other data of note this week is Markit Manufacturing PMI for July which is released on Monday and expected at a reading of 60.4.


The dollar was one of the worse performing G10 currencies last week only making ground against the Aussie and Kiwi dollar. Although the FOMC made more hints at the upcoming QE tapering, the impact on the risk sentiment was limited and non-negative as the message remained cautious, and QE tapering later this year has been widely expected by the markets. It now looks like the dollar may struggle for strength going forward as the markets accept that we are unlikely to get any surprises from the Fed and that high inflation is here, transitionary or not. Though a lot of the dollar weakness is said to be end of month profit taking, with markets that had already priced in the extra bit of hawkishness at the July FOMC and cashed in on some long-dollar positions.

The Jackson Hole Economic Symposium at the end of August now looks to be the event where the Fed will announce their timeline for asset purchase reductions or enough to force a price-out of rising expectations around a 2022 rate hike. It’s a busy week data wise for the dollar with the main event coming on Friday with Nonfarm Payrolls expected at 900K. This should underpin the notion that the labour market is on a solid recovery path. Monday will see ISM Manufacturing PMI for July expected at 60.9 and ISM Services PMI at 60.4 on Wednesday. Congress will be discussing the Debt-ceiling which is worth keeping an eye on as it may impact on the US money markets.


The Euro reached month highs versus the dollar and was looking to reclaim 1.19 in the final session on Friday after data from Eurostat suggested expectations of the Eurozone economy may have become too downbeat following a turbulent start to the current year. Europe’s economy grew at a pace of 2% during the three months to the end of June, far better than the 1.5% consensus. The ECB strategy review points towards a very cautious ECB that should keep the policy ultra-accommodative for a prolonged period of time.

The euro is likely to be a reactionary currency this week due to its quiet data calendar. The policy divergence between the Bank of England and European central bank should continue to widen as the ECB has signalled strongly that it does not plan to raise rates even as the eurozone economy is recovering more strongly and inflation is set to rise above target. This means the euro could be in for a tough end to the year, especially versus the pound.

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