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Cable Remains On Back Foot Ahead Of Bank Of England Monetary Policy Announcement.

By Alex Edwards

It was a quiet start to the day yesterday as markets took a breath following the heavy risk selling the day previously. The dollar remained broadly strong and GBP/USD settled around its seven month low. Investors were also a little cautious ahead of the House of Commons vote that afternoon; the Brexit bill passed through Parliament by 319 votes to 303 as Tory rebels were told they would be given a meaningful say in negotiations. It’s a huge relief to PM May who has since vowed to make the process of the UK’s withdrawal from the EU “smooth and orderly”.

It hasn’t done much to support the pound, however, with cable testing fresh lows this morning. Traders are now a little nervous ahead of today’s Bank of England monetary policy announcement, albeit it seems any dovish slant to the minutes and announcement are well and truly priced in. The expectation is for interest rates to be left on hold and for the bank to signal a wait and see approach. It therefore means the risk is to the upside for the pound. In other words, any surprises would likely be hawkish surprises and so positive for the pound. The most likely of these surprises (if there is such thing as a likely surprise!) is that the bank hint of a potential rate hike as early as August. Governor Carney is due to speak tonight at Mansion House too, so is the Chancellor, and so we may see some further movement in GBP/USD on the back of this.

The dollar continued to grind higher against most of its major peers yesterday with the dollar index continuing to trade above 95.00. The trade war rhetoric has continued throughout the last 24 hours, although it seems to be getting less and less attention from traders and investors. Meanwhile US data, released yesterday, was mixed with Building Permits printing weaker than expected and Housing Starts coming in mildly stronger than market forecasts. Fed Chair Powell was also speaking yesterday along with other central bank heads but said little to surprise markets; he reaffirmed the Fed’s approach to hiking interest rates gradually.

There may be a little more focus on US data today with the Philly Fed Manufacturing Index due for release at 1:30pm. Other than this, the data docket looks light, so we may continue to see broad dollar strength throughout the day.

EUR/USD remains on the back foot this morning, mostly a result of the broad dollar strength. The ECB’s Nowotny was trying to talk the euro lower on Wednesday which didn’t really help the single currency’s cause. He pointed out the widening interest rate differentials between US and EU rates.

In other news the SNB announced that it would be leaving interest rates on hold this morning and the accompanying statement wasn’t much changed from the last one. It’s not affected CHF or EUR. There isn’t a lot of European economic data due today either and so we may well continue to see EUR/USD trade towards the bottom of its most recent range.

In light of a stabilising backdrop this morning, the Australian dollar currently swaps hands at a rate of 0.7360. In looking ahead as to what’s likely to drive direction between now and the end of the week, the economic docket locally is void of any market-moving potential, hence risk sentiment is likely to play a big role as investors eye levels closer to the 74 US cents mark.

The Canadian dollar edged lower through trade on Wednesday making new 12 month lows against the dollar. While moderating somewhat the sell-off has persisted as trade tensions continue to plague broader market sentiment and risk aversion remains the primary directional driver. Concerns surrounding existing NAFTA policy and future trade relationships between the US and Canada are dampening demand for the loonie as investors look to shift net holdings and extend USD/CAD bullish bets. Having fallen more than 8% year to date and with traders still holding a net short position since mid-May, there is scope for further USD gains and a move towards mid 2017 highs in USD/CAD.

Attentions now turn to crucial retail sales and inflation data Friday for macroeconomic guidance while broader sentiment is dominated by ongoing trade tiffs and the threat of an escalation into an all-out trade war.

The New Zealand dollar resumed its downtrend in overnight trading. NZ GDP was released overnight and printed in line with market expectations at 0.5% q/q. The kiwi continued to trade towards the lower end of its range following the release of the data and with little by way of data due between now and Friday this could remain the case for the rest of the week.