Daily Currency Update

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Bank of England set to raise rates on Super Thursday.

By Alex Edwards

The pound stuck to a narrow range vs. the US dollar yesterday, trading just above 1.31 for most of the day. UK Manufacturing PMI printed more or less in line with expectations and US data was mixed. Investors have also been reluctant to do much ahead of today’s much anticipated Bank of England monetary policy announcement.

The Old Lady is widely expected to raise interest rates from 0.5% to 0.75%, but it’s not fully priced in, and there are a few different scenarios that could play out, particularly so when Carney speaks following the announcement. If the bank raises rates but Carney cites Brexit risks and signals interest rate neutrality for the foreseeable – the most widely anticipated scenario - then any upside in GBP may be limited. If the bank leaves rates on hold (markets expect there’s a 10% chance of this happening), no matter what Carney says, the pound will likely fall, and break down through 1.30. The bank and Carney’s credibility may also be at risk in this circumstance, given they haven’t taken an opportunity over the last month or so to extinguish the market’s growing expectations that the BoE will hike today. Other scenarios such as raising rates/whilst taking a hawkish stance are so unlikely at this stage it’s hardly worth considering, but either way there’s a good chance we’ll see some volatility in the pound today.

The bank also publishes its Inflation Report in which we’ll get details on forecasts for short, medium and long term inflation. In the last report the BoE saw inflation at 2.35% in 2-3 years, based on unchanged monetary policy. Meanwhile, there’s less data due out from the US today but traders will have half an eye on tomorrow’s Non-Farm Payrolls.

The dollar was stable for the most part yesterday, slightly weaker if anything come the end of the New York session. Data by way of weaker than expected ISM Manufacturing PMI and stronger than expected ADP Non-Farm Employment Change – a forerunner to tomorrow’s Non-Farm Payrolls – mostly balanced each other out. Investors were also more interested in what the FOMC had to say that evening.

The Fed left rates on hold, as widely expected, and its statement was little changed from the last one. Among the few changes, the Fed upgraded household spending from “has picked up” to “has grown strongly”. They also said that they see "strong" economic growth. The announcement was a bit of a damp squib in the end as trading conditions seem to be overshadowed by confirmation of Trump proposing raising tariffs on Chinese imports from 10% to 25%.

Despite this, the dollar seems well bid this morning with EUR/USD slipping under 1.1650 and GBP/USD dropping below 1.31 in the last couple of hours.

EUR/USD traded sideways for most of the day yesterday, just shy of the 1.17 figure for the most part. European manufacturing PMIs, released yesterday morning, were mostly mixed and a non-event as far as EUR/USD traders were concerned.

There’s no European data due out today and so EUR/USD will likely take its lead from offshore events and associated global risk appetite.

AUD/USD is weaker this morning, sold off following confirmation of proposals by the US to raise tariffs on Chinese imports. In other news overnight, Australian trade data beat market expectations but it didn’t have too much of an impact on the local unit.

Aussie retail sales data is due to be released tonight and will be a key focus for AUD/USD traders in Sydney. The US jobs report, due to be released later in the week, will also be a focus in the London/New York sessions on Friday.

The Canadian dollar has been holding well lately despite the drop in oil prices and potential unilateral NAFTA deal between the US and Mexico.

Yields in Canada have been trading higher, supporting the CAD, with the 2-year trading at a multi-year high. USD/CAD is little changed around 1.30. Support is seen at 1.2950 while 1.3050 will now act as short-term resistance.

For the same reasons we’ve seen AUD/USD fall in the last 12 hours or so, NZD/USD has also fallen. Risk is off following confirmation of the US tariff proposals and many of the commodity currencies have suffered declines as a result. NZD/USD opens this morning at .6765.