Markets braced for choppy trading ahead of the Bank of England policy decision.

US data was mixed with weak jobs data offset by a strong non-manufacturing data. There was more hawkish commentary on a potential tapering of asset purchases from Fed vice-chair Clarida.

US bond yields were only slightly higher on the day. Wall Street equities posted modest losses and Chinese equities dipped sharply in late trading.

The dollar posted significant net gains after Clarida’s comments. EUR/USD dipped below 1.1850 and remained on the defensive on Thursday. Sterling sentiment held firm, but EUR/GBP found support on approach to the 0.8500 level. Commodity currencies retreated from intra-day highs, but sentiment held firm.

The final Euro-zone PMI services-sector index for July was revised down to 59.8 from the flash reading of 60.4 with a downward revision for the German index while both Spanish and Italian readings came in below market expectations. Euro-zone retail sales increased 1.5% for June with a 5.0% annual increase.

US ADP data recorded an increase in private-sector payrolls of 330,000 for July which was well below consensus forecasts of 695,000 while there was a downward revision to the June data to 680,000 from 692,000 previously. The dollar edged lower after the data, although the overall impact was limited given that the ADP data has had only a limited correlation with the monthly jobs report.

There was also further evidence of labour and raw-material shortages curbing increases in payrolls.

EUR/USD posted net gains after the data and touched 1.1900, but was unable to extend the advance with renewed selling interest.

There was an important impact from Fed Vice President Clarida who stated that he expected inflation to moderately exceed 2% in 2022 and 2023. He added that he can definitely see the Fed announcing a tapering of bond purchases later this year. He also stated that he can see the conditions for an increase in interest rates could be met by the end of 2022, although he reiterated that tapering asset purchases and raising interest rates were two very different things.

The dollar secured strong support following Clarida’s comments with EUR/USD dipping below 1.1850 amid stronger expectations of tapering this year.

San Francisco head Daly added that her model outlook is that the central bank will be able to taper later this year or early next year which helped underpin the US currency. The dollar maintained a firm tone on Thursday with EUR/USD held below 1.1850 although commodity currencies were resilient.

The dollar remained on the defensive ahead of Wednesday’s New York open and dipped lower after the ADP jobs data with a USD/JPY retreat to lows near 108.70.

The ISM non-manufacturing index strengthened sharply to 64.1 for July from 60.1 in June and well above market expectations of 60.5. There was a notably stronger rate of increase in business activity and the new orders growth also increased at a slightly stronger rate. After an unexpected decline for June, employment increased in July while prices increased at a faster rate. The data triggered fresh expectations over a surge in US activity which propelled the dollar slightly higher.

There was only a limited response in Treasury markets to the US business confidence data, but there was a sharp initial USD/JPY surge to 109.30. The US currency extended gains following Clarida’s comments with a USD/JPY move to above 109.50 amid wider US currency gains.

Activity was restrained in Asia on Thursday with the yen losing some ground on the crosses while regional equity markets were mixed. USD/JPY posted net gains to 109.65 even though the 10-year yield was held below 1.20% with EUR/JPY around 129.75.

The final UK PMI services-sector index for July was revised up to 59.6 from the flash reading of 57.8. There were further important supply-side issues, especially with staff shortages while there was further upward pressure on wages. Input prices increased at the fastest rate for 25 years and charges also increased at the fastest rate on record. The Bank of England will be monitoring inflation trends closely, especially if there is evidence that higher inflation pressures are not transitory.

There was a retreat against the dollar with a fresh GBP/USD test of 1.3900, although the Euro was unable to sustain a recovery.

The Bank of England will announce its policy decision on Thursday with principal attention likely to be on the asset-purchase vote with the potential for a split on the committee. Growth and inflation forecasts will also be important for the UK currency. Sterling was unable to make headway in early Europe on Thursday as GBP/USD traded just below 1.3900 while GBP/EUR settled just below 1.1750. Markets were braced for choppy trading following the Bank of England policy decision.

Economic Calendar

07:00German Factory Orders (M/M)(JUN)1.90%-3.20%
07:45Industrial Output MM(JUN)-0.30%
09:00ECB Economic Bulletin
09:30GBP PMI Construction(JUN)66.3
12:00BOE MPC Vote Cut(AUG 01)0
12:00BOE MPC Vote Hike(AUG)0
12:00BOE MPC Vote Unchanged(AUG)9
12:00BoE QE Purchase Target(M/M)(JUL)875B875B
12:00BoE Rate Decision(M/M)(AUG)0.10%0.10%
13:30USD Trade Balance(JUN)-71.20B
13:30CAD Trade Balance(JUN)0.37B-1.39B
13:30USD Initial Jobless Claims384K400K
23:30AUD AiG Performance of Service Index(JUL)57.8

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.