Will they opt for their biggest UK rate hike in 27 years?

According to the latest market expectations, the Bank of England (BoE) are likely to raise UK interest rates by 0.5% later today, which will put the UK base rate at 1.75%, potentially marking the biggest hike by the BoE for over 27 years in the process. Markets have been encouraged to tie their collective masts to a 50bps move, given the stronger growth figures in the UK recently, as well as recent comments from the BoE’s Bailey, who suggested that ‘everything is on the table’, including a 50bps hike.

Is 50bps a done deal then?

Not exactly. Much like just about everywhere else at the moment, surging UK inflation would clearly argue for a bold move (such as 50bps) from the BoE, especially given those big increases to the cost of living. However, the higher the interest rate goes, the more those who have larger debts will also need to pay in increasing interest payments (including the UK government). Furthermore, there are already clear signs of weakness in the UK economy, even if growth may have surprised to the upside of late, which could see the BoE hiking into a weakening economy. That never ends well. The arguments within the BoE on which way to go may well be reflected in the voting, with a 9-0 vote unlikely on the day.

What about the pound?

Sterling had been faring very well of late, with GBP/USD moving as high as 1.2300 on Tuesday. That move was as much to do with broader dollar weakness, rather than the pound rallying on a pre-BoE move. However, the dollar rallied across the board through yesterday, and GBP/USD slipped back below 1.2150. An element of position squaring ahead of the BoE must also have been a factor to the decline. Furthermore, slightly softer PMI readings in the UK for both Composite (at 52.1 versus 52.8 exp) and Services (at 52.6 versus 53.3 exp), also weighed on sentiment. If nothing else, we should probably expect heightened volatility in the pound around lunchtime today. At the end of the day, BoE governor, Andrew bailey, will also be giving a speech.

A surprise jump in the ISM

The latest U.S Services PMI came in much higher than expected through July, with business activity expanding to 56.7, versus a 53.5 forecast. The prices paid Index declined to 72.3 (from 80.1), highlighting another big drop for prices, which could be a marker to weaker inflation further down the road. The news helped to boost the dollar, with the dollar index rallying back over 106.00. Volatility in USD/JPY continues of late, with the pair moving from 139.00 to near 130.00, and back over 134.00 yesterday afternoon.

Retail slows

The latest Euro area Retail Sales saw a surprising drop of 1.2% (MoM/Jun), bringing the yearly figure down to -3.7%. Weak consumer confidence, and rising prices were both big factors to the declines. EUR/USD drifted back to the mid 1.01 region, with the downside limited on the day by stronger S&P Global Composite and Services PMI’s. In the case of the former, at 49.9 (versus 49.4 exp) and the latter at 51.2 (versus 50.6 exp). GBP/EUR slipped back towards 1.1950, having failed to penetrate the key 1.2000 resistance.

What else is happening today?

EUR – Economic Bulletin

GBP – BoE’s Pill, Bailey Speech

USD – Challenger Job Cuts, Continuing Jobless Claims, Goods and Services Trade Balance/ Goods Trade Balance, Initial Jobless Claims

CAD – Building Permits, Exports/Imports