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All eyes were on the pound today, thanks to the BOE Statement. And unfortunately for the pound, the BOE statement triggered wave after wave of selling pressure.

  • Spanish services PMI: 57.6 vs. 58.4 expected, 58.3 previous
  • Italian services PMI: 56.3 v.s 54.2 expected, 53.6 previous
  • French final services PMI: 56.0 vs. no change from 55.9 expected
  • German final services PMI: 53.1 vs. no change from 53.5 expected
  • Euro Zone final services PMI: unchanged at 55.4 as expected
  • U.K. services PMI: 53.8 vs. 53.6 expected, 53.4 previous
  • BOE: 6-2 vote to keep the Bank Rate at 0.25% vs. 6-2 vote expected
  • Ian McCafferty and Michael Saunders voted for a hike again
  • BOE: 8-0 vote to maintain stock of government bonds purchased at £435B
  • BOE: 8-0 vote to maintain stock of corporate bonds purchased at £10B

Major Events/Reports

U.K. services PMI higher

Markit released the U.K.’s services PMI report and the headline reading was revealed to have risen from 53.4 to 53.8 in July, which is slightly better compared to the consensus that it would rise to 53.6.

According to commentary from Markit, the higher reading was due mainly to “the pace of job creation edging up to its strongest for a year-and-a-half.” The fact that new orders growth was “slightly stronger than June’s nine-month low” also helped.

MPC rate decision, minutes, and inflation report

The BOE’s MPC released the minutes for its latest monetary policy huddle as well as its updated inflation report earlier today. And below are some of the more important and/or interesting points in, well, bullet points for easier reading:

  • The MPC voted to maintain the BOE’s current monetary policy
  • 6-2 vote to keep the Bank Rate at 0.25%
  • 5-3 vote previous, 6-2 vote expected since Super Hawk Kristin Forbes no longer an MPC member
  • Ian McCafferty and Michael Saunders voted for a hike again
  • 8-0 vote to maintain stock of government bonds purchased at £435B
  • 8-0 vote to maintain stock of corporate bonds purchased at £10B
  • Forecasts for GDP downgraded; see graphic below for details
  • According to the BOE, the downgrades reflect the weak GDP growth in Q1 and Q2 and GDP growth is expected to remain “sluggish in the near term as the squeeze on households’ real incomes continues to weigh on consumption.”
  • “In addition, the anticipation of Brexit and related uncertainties are likely to dampen investment growth somewhat.”
  • Q3 2017 forecast for CPI upgraded; see graphic below for details
  • CPI Forecasts for 2018 and 2019 marginally lower but essentially unchanged
  • Upgraded forecast for 2017 reflects the BOE’s expectation that inflation will “rise further in coming months and to peak around 3% in October, as the past depreciation of sterling continues to pass through to consumer prices.”
  • According to the BOE, the revisions are only minimal, so much so that the projections in August “are very similar to those made three months ago.”
  • However, “Those judgements depend on assumptions about the United Kingdom’s trading relationships after Brexit and about the transition to those arrangements.”
  • They also assume that households and companies base their decisions on the expectation of a smooth adjustment to those new trading arrangements.”
  • [S]ome tightening of monetary policy would be required to achieve a sustainable return of inflation to the target.”
  • [I]f the economy were to follow a path broadly consistent with the August central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections.”
  • In the United Kingdom, the market-implied path for Bank Rate reaches 0.8% in three years’ time, around 20 basis points higher than at the time of the May Report. Within that, a full 25 basis point rise in Bank Rate is now implied by late 2018.”
  • [T]he market yield curve underlying the August projections, which was consistent with two 25 basis point increases in Bank Rate over the forecast period.”
Source: August BOE Inflation Report
Source: August BOE Inflation Report

Major Market Mover(s):

 GBP

The pound had a promising start since it jumped higher when the U.K.’s services PMI managed to beat expectations. That was the last hurrah for pound bulls, though, since the BOE statement apparently pulled the rug from under the pound.

A quick read of the minutes and the updated inflation report shows that the BOE’s GDP forecasts were downgraded while 2017 CPI was upgraded and 2018 and 2019 CPI were marginally downgraded, so kind of a mixed picture when it comes to outlook.

Even so, the BOE said that the projections in August “are very similar to those made three months ago.” The BOE even hinted that it still has a hiking bias and McCafferty and Saunders even voted for a hike again.

However, the hawkish camp has clearly been weakened with Forbes’ departure. And Haldane, who expressed hawkishness recently, refused to step up to the plate and join the hawkish camp. And the market is probably very disappointed with that. Also, the BOE reiterated that its assumptions hinge on a smooth Brexit transition, which may have also helped to sour sentiment on the pound.

GBP/USD was down by 87 pips (-0.66%) to 1.3143, GBP/JPY was down by 130 pips (-0.89%) to 145.05, GBP/CHF was down by 71 pips (-0.56%) to 1.2741

Watch Out For:

  • 12:30 pm GMT: U.S. initial jobless claims (242K expected, 244K previous)
  • 1:45 pm GMT: Markit’s final U.S. services PMI (no change from 54.2 expected)
  • 2:00 pm GMT: ISM’s non-manufacturing PMI (56.9 expected, 57.4 previous)
  • 2:00 pm GMT: U.S. factory orders (2.9% expected, -0.8% previous)