Market sentiment more positive as BoE decision looms

Updated August 4, 2022

Headlines

*Global shares climb towards highest levels since June

*Bank of England on brink of biggest rate hike since 1995

*Dollar steady as Fed officials suggest more rate hikes to come

*Asian stocks rise on upbeat data, Alibaba stock recovery eyes earnings  

US equities advanced for the first time this week helped by better-than-expected data and strong corporate earnings. The S&P500 rose 1.56% with tech and consumer stocks leading the way. The Nasdaq jumped 2.73% to its highest level since early May. This was driven in part by a 9.2% surge in PayPal shares, which led the rally in tech. Asian markets are in the green with tech also helping gains. US futures are mixed.

USD closed mixed against its major peers. The DXY printed a “doji” candle opening and closing in the middle of the day’s range. Price action in the euro was similar, with consolidation below 1.02. GBP slipped to 1.2149 and is trading just below support. USD/JPY moved higher in line with rising US Treasury yields. It is still trading below the 50-day SMA at 134.709. USD/CAD is also trading below its 50-day SMA at 1.2856, ahead of Friday’s North American jobs data.

Day Ahead – BoE to hike by 25bp or 50bp?  

Markets expect the Bank of England to raise rates by 50bps at its “Super Thursday” meeting today to 1.75%. With unemployment low and inflation set to accelerate, the hawks argue that the time is right to increase the pace of policy tightening. But while price pressures are set to rise by double digits into the autumn, demand seems to be moderating – and quickly. Wage growth too, has shown few signs of de-anchoring.

A steady 25bp would be a fifth consecutive rate rise of that size. But if the fresh new forecasts show both growth and inflation revised higher, then medium-term CPI projections may be enough to convince policymakers to copy its central bank peers with a larger hike. Data dependency and a meeting-by-meeting outlook seem probable. Dissenters too, with consensus going for a 7-2 vote with two officials opting for a smaller quarter point move.

Chart of the Day – EUR/GBP poised above support

As well as the size of today’s rate hike, markets will also focus on future rises. The journey to neutral, roughly 2%, is nearly done. Markets price in a terminal rate close to 3% by early next year. Many economists think this is a stretch and the MPC may temper any hawkish shift.

GBP/USD is currently trading around a zone of levels. This includes the 50-day SMA at 1.2188 and the mid-May low at 1.2155. There is also long-term trendline resistance/support around 1.2140. EUR/GBP looks more enticing with prices trading just above a low last seen in April. Support is 0.8339 with the downtrend relatively firm. Resistance is initially at 0.84.

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