Move over, Brexit troubles! It’ll be the BOE’s turn to take center stage with Super Thursday coming up. But will breakup jitters still loom?
BOE Super Thursday (Aug 2, 11:00 am GMT)
For the newbies out there, Super Thursday refers to the trifecta of top-tier events in the BOE, all happening in just a span of a few hours. This involves the central bank’s latest monetary policy decision, the release of the minutes of their meeting, and the update of their forecasts in the Inflation Report. Exciting times!
As you’ve probably guessed, these events tend to rock the pound’s world, even in the moments leading up to the actual happenings. This particular announcement is expected to be an interest rate hike, as policymakers actually came close to tilting the vote to tighten last time.
The MPC minutes could show all but one MPC member voting to hike interest rates, and a unanimous decision could mean even more gains for sterling. To top that off, upgraded growth and inflation forecasts in their Inflation Report could keep pound bulls hopeful for yet another hike later this year.
But with high expectations comes plenty of room for disappointment. A dovish hike or one that’s accompanied with a lot of cautious remarks downplaying the likelihood of another tightening move soon could keep the pound’s gains limited, and any negative revisions to their forecasts could also be a downer.
Also keep in mind that Carney has been mentioning a possible “no deal” Brexit situation in his more recent testimonies, so this scenario could also be discussed in their Super Thursday events.
Last Week’s Price Review
The pound is mixed for the week (as of 2 pm GMT). The pound is a net winner, however, which isn’t that impressive but is a decent enough run after last week’s beat-down that caused the pound to finish in last place.
The Aussie and Kiwi are closing the gap, though, so there’s a risk that the pound may end up being a net loser and mark its second week of losses.
A quick glance at the overlay of GBP pairs yields the (not so) profound realization that the pound’s price action was a rather chaotic mess. There are also very clear instances of diverging price action.
Given all that, the obvious conclusion is that the pound was rather vulnerable to its peers.
Having said that, the pound wasn’t really too vulnerable to opposing currency price action since the pound’s price action becomes more uniform if we remove GBP/AUD and GBP/NZD from the overlay.
As you can see, the pound had a mostly weak start, which market analysts blamed on Greenback strength.
The Greenback weakened on Tuesday, though, and market analysts were quick to attribute the pound’s recovery to dollar weakness.
The pound continued to lose ground against the Kiwi and the Aussie, though, likely because the two higher-yielding comdolls were getting extra buyers due to the risk-friendly vibes.
However, more GBP bulls would later join the fray when British PM Theresa May announced that she will take control of Brexit talks. And there were apparently enough buyers that even the Kiwi and Aussie were forced to grudgingly bend the knee.
The pound’s price action then became mixed come Wednesday, before encountering broad-based selling pressure on Thursday, likely because of the Greenback’s strength at the time. The Aussie and Kiwi were apparently more vulnerable to Greenback strength, though, since the pound scored easy wins against those currencies.
However, the pound soon got its comeuppance and was forced to bend the knee even to the Aussie and Kiwi when Brexit-related jitters got reignited after Michel Barnier, the E.U.’s Chief Brexit negotiator, said the folowing during a presser:
“The UK wants to take back control of its money, law, and borders, as Dominic [Raab] said in an article this morning. We will respect that. But the EU also wants to keep control of its money, law, and borders. The UK should respect that.”
“The EU cannot – and will not – delegate the application of its customs policy and rules, VAT and excise duty collection to a non-member, who would not be subject to the EU’s governance structures.”
“Any customs arrangements or customs union – and I have always said that the EU is open to a customs union – must respect this principle.”
In other words, Barnier effectively shot down Theresa May’s Brexit customs proposals, which means little to no progress has been made in Brexit talks, thereby increasing the odds for a “no deal” Brexit.
At any rate, the pound steadily weakened after that before finally finding support and even tilting higher on some pairs when Friday’s London session rolled around.
And as noted in Friday’s London session recap, there were no apparent catalysts for the pound’s recovery, but it’s possible that we’re just seeing some short covering by GBP bears after the pound got whupped on Thursday.
Do note, however, that the Aussie and Kiwi appear to have regained their mojo after the Greenback began to stumble when U.S. GDP failed to meet expectations.