British Pound Update – GBP/USD Stuck in a Rut Ahead of The BoE
- A 50bp hike would be the largest increase since 1995.
- S&P Global/CIPS Services PMI missed first estimates.
- The US Dollar grabs a small bid.
The Bank of England is expected to hike interest rates for the sixth consecutive meeting on Thursday as the central bank continues to grapple with soaring inflation. The UK central bank is seen hiking the Bank Rate by 50 basis points, the largest increase since 1995. A 50bp hike would take the UK borrowing rate to 1.75%, the highest level in over 14 years. The Bank of England has said that they expect UK inflation to hit double-figures at the end of Q3/start of Q4. A recent report by the National Institute of Economic and Social Research (NIESR) forecast that UK inflation would hit 11% and that the UK central bank would have to lift the Bank Rate to 3% to bring price pressures under control.
The latest S&P Global/CIPS services PMI missed original expectations and warned that UK services sector activity eased to its slowest rate in 17 months as ‘inflationary pressures and the cost-of-living squeeze resulted in heightened economic uncertainty’. Tim Moore, economics director at S&P Global Market Intelligence wrote, ‘Any slowdown in inflationary pressures can't come soon enough for service providers, with many firms reporting growing customer resistance to price hikes and a subsequent downturn in demand as higher energy, fuel and staff costs are passed on to customers."
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The US dollar picked up a small bid on Tuesday as US House Representative Nancy Pelosi landed in Taiwan, sparking anger and threats of retaliation from China. Ms. Pelosi, the highest elected official to visit Taiwan in more than 25 years, said that America’s determination to preserve democracy in Taiwan, ‘remain iron clad’. In response to Ms. Pelosi’s visit, China has retaliated with a range of economic sanctions and has begun military drills in the region. The US dollar basket currently trades around 105.85, having traded as low as 104.75 on Monday.
GBP/USD is currently in limbo ahead of Thursday’s policy decision. A combination of a marginally stronger USD and a flat GBP has pushed GBPUSD back below 1.2200, although the move lacks any real conviction. Tomorrow’s decision, and MPC commentary post-decision, will decide Sterling’s short-term fate.
GBP/USD Daily Price Chart – August 3, 2022
Retail trader data show 68.77% of traders are net-long with the ratio of traders long to short at 2.20 to 1. The number of traders net-long is 6.18% higher than yesterday and 8.35% lower from last week, while the number of traders net-short is 12.59% lower than yesterday and 0.25% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may continue to fall. Positioning is more net-long than yesterday but less net-long from last week. The combination of current sentiment and recent changes gives us a further mixed GBP/USD trading bias.
What is your view on the British Pound – bullish or bearish?? You can let us know via the form at the end of this piece or you can contact the author via Twitter @nickcawley1.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.