The Bank of England (BoE) voted 7-2 to maintain rates at 5.25% for another month. As anticipated, the meeting had little immediate impact, with GBP/USD and GBP/EUR slipping by less than 0.4%, despite the likelihood of an August rate cut increasing from 30% to over 60%. This morning, sterling remains steady, unaffected by stronger-than-expected UK retail sales and the highest consumer confidence in over two years.
Key insights from the BoE’s statement and meeting minutes indicated a "finely balanced" decision not to cut rates, highlighting divisions among the majority about the significance of unexpectedly strong services inflation. This announcement followed data showing UK inflation had reached the central bank’s 2% target for the first time in almost three years, although the services sector inflation slowed less than anticipated. Some policymakers, despite voting to keep rates unchanged, noted that surprises in services inflation hadn't altered the economy's disinflationary path. This was perceived as dovish, leading to a slight decline in UK gilt yields and the British pound.
Sterling remains surprisingly resilient, even though it appears overvalued compared to swap differentials, particularly against the EUR and USD. This resilience might be attributed to factors beyond cyclical and monetary policy considerations, such as the prospect of more stable UK politics and improved UK-EU relations under a potential Labour Party leadership, which could act as a bullish factor.
The US dollar has experienced a relatively calm period recently, despite US yields hitting a two-month low. The dollar faced mild selling pressure as US retail sales for May rose less than expected, reinforcing a 60% probability of a Fed rate cut in September. However, dovish policy signals from Europe are helping to keep the dollar stable. Today, attention shifts to flash industry PMIs from Europe, the UK, and the US, offering an initial look at economic activity deviations for June.
Yesterday's data releases included the Philly Fed survey, jobless claims, and housing starts, all of which came in slightly weaker than expected. Despite this, US Treasury yields edged up slightly, supporting the dollar against most major currencies. Recent hawkish comments from the Federal Reserve, in contrast to its major peers, are keeping the dollar on track for its third consecutive weekly rise. Notable gains have been made against the Swiss franc, which came under selling pressure after the Swiss National Bank cut interest rates for the second time this year. The Japanese yen is also drawing attention, with verbal intervention anticipated as it trades around 158.90 per dollar, close to the significant 160 per dollar level. Meanwhile, the US has added Japan to its “monitoring list” for foreign-exchange practices but stopped short of labelling it a currency manipulator.
