Bank of England, US Dollar, and Euro Face Crucial Decisions and Divergent Data.

• Bank of England Decision: Barclays forecasts a rate cut by the Bank of England on August 1, potentially weakening the Pound further, depending on accompanying communication.
• Pound’s Market Impact: The Pound has been under pressure with increasing expectations of a rate cut, with market odds nearing 60%.
• US Dollar Movement: The USD gained slightly due to strong job openings data and consumer confidence, but its rise was limited by expectations of a Federal Reserve rate cut.
• Eurozone Divergence: Eurozone GDP and inflation data show mixed signals, complicating the ECB’s decision-making, particularly with Germany’s negative GDP contrasting stronger performances from Spain and France.
• Currency Range Expectations: The Euro is expected to remain in a tight range against the USD, influenced by uncertain ECB policy directions and diverging economic data across member states.

GBP: The Bank of England preview: downside and upside scenarios for the British Pound. A note from Barclays says, “A hawkish cut by the MPC is an opportunity for the pound,” ahead of the Bank of England’s eagerly anticipated August 01 policy decision. Economists at Barclays expect the Bank of England to pull the trigger on the cutting cycle this Thursday, based on “the revealed preference in June by the core of the MPC to start easing soon.” The rule of thumb is that a rate cut can weigh on the Pound. Indeed, we have seen the UK currency come under pressure over the past five days as market expectations for a cut have gradually inched higher to stand close to 60% at the time of writing. In theory, a cut would require the difference (approx. 40%) to be priced into the Pound, which would mechanically trigger further downside. “One risk that could also slow the pace of further GBP appreciation is BoE policy,” says Joshua Wilcock, FX Strategist at BNP Paribas. “An August move could precipitate some near-term GBP weakness as rate differentials could narrow given that the market has not fully priced in a 25bp cut at the time of writing.” But the extent of this downside, and whether the currency can ultimately rebound, will depend on the accompanying communication. A plurality of economists expect an August 01 start date, particularly given the odds of a September cut at the Federal Reserve are now close to 100%, offering the much-desired cover Governor Bailey and his team would prefer.

USD: At the time of writing GBP/USD was trading at $1.2827, down approximately 0.3% from Tuesday’s opening rate. The US Dollar (USD) edged higher on Tuesday following the latest JOLTs job openings release. The data showed that a larger-than-forecast number of jobs were added by the US economy in May. Though marginally declining from May’s figures, the releases served to quell surmounting fears of a slacking US labour market. The Bureau of Labor Statistics said: ‘Job openings increased in accommodation and food services (+120,000) and in state and local government, excluding education (+94,000). The number of job openings decreased in durable goods manufacturing (-88,000) and in federal government (-62,000)’ Furthermore, the latest US consumer confidence index surpassed market projections for July, indicating a continually robust US economy. However, with the Federal Reserve due to deliver its latest interest rate decision on Wednesday, USD’s upside potential was somewhat limited, as surmounting Fed rate cut bets prevented any notable gains for the ‘greenback’. Elsewhere, an increasing appetite for risk seemingly capped the safe-haven US Dollar’s upside potential.

EUR: Inflation data showed a slight pick-up in July. GDP was better than expected. These support a “hold” by the ECB. However, the data in Germany complicates matters. The primary factor influencing the euro in the upcoming weeks and months is whether the economic data will alter market expectations regarding additional rate cuts. Currently, two more cuts are anticipated this year, but this number could increase to three if inflation falls significantly or if the ECB becomes concerned about weak economic indicators. Key data released on Tuesday, including GDP and CPI figures, appeared to support a more hawkish stance, suggesting only two rate cuts. Consequently, the euro demonstrated some relative strength against the pound but declined by 0.2% against a strong US dollar. The ECB have some difficult decisions ahead and they must wish for a simpler job where only one country’s GDP or CPI is the consideration. Diverging data in Germany and other large economies such as France and Spain must give the central bank a headache. GDP figures for the EU as a whole came in better than expected at 0.3% for Q2. This is unchanged from Q1 and posts a H1 reading of 0.6%. It’s hardly impressive but it at least shows a consistent recovery away from some of the recessionary readings in 2023. The problem with the EU-wide figure is that it glosses over a negative reading in Germany of –0.1% which was balanced out by strong readings in Spain and France. Spain actually posted a reading of 0.8% and as ING pointed out, “Leave out Spain and you just have an economy that moves along at a lacklustre growth pace.” France posted growth of 0.3% and Italy 0.2%, which will be no concern and does not scream out for a rate cut. Germany, on the other hand, does seem to need some help and the GDP figures confirm the weak PMIs from recent months. With GDP of –0.1% and CPI of 2.3%, cutting rates would make sense. But then you have Spain with GDP of 0.8% and annualized CPI of 3.2%. All this adds uncertainty on a September cut from the ECB and will keep the euro in its current range until there is a firm move in expectations either way. EURUSD looks comfortable between 1.07 and 1.09.