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Daily Wrap Up 04 August 2022

4 Aug 2022 05:35 PM

Sterling slides gloomy BoE forecast

Sterling took a knock today because of the gloomy update from the Bank of England. The UK central bank lifted interest rates by 0.5%, in line with economists’ expectations. Eight of nine policymakers supported the move, but there was one dissenter, Silvana Tenreyro, voted for a 0.25% lift. Traders were disappointed by the fact the BoE did not do a 50-basis points hike in June, so it says a lot about the body that it could not get unanimous support today. The group warned of a recession, and it now predicts that CPI will hit 13.3%. Seeing as the BoE have hiked interest rates six times since December, and they still feel that inflation will continue to rise, it is almost as if they are admitting their monetary tightening can not control CPI. It begs the question, why hike at all if you feel that factors beyond your control – food prices, energy costs and supply chain issues - are the main culprits for rising inflation. Considering the bleak outlook, the pound has not fallen too much.

GBP/USD is flat but that has more to do with the extended fall in the US dollar. The greenback was in the red this morning and things went from bad to worse as it was announced the jobless claims reading increased to 260,000, its highest mark in seven months. There are creeping concerns the US economy is going down a gear because this week the manufacturing and services PMI reports fell to two-year lows. Today’s jobs data adds to the fears about an actual recession, hence the weakness in the US dollar.

Stock markets in Europe printed fresh two-month highs, which seems at odds with economic backdrop as the eurozone and the UK also revealed downbeat manufacturing and services data this week. It is worth pointing out the peak in the FTSE 100 was partially due to the weakness in the British pound. Some of the index’s constituents derive a large portion of their revenue from outside Britain so the softer pound boosts their sales numbers. The Dow Jones is a touch lower as the sub optimal jobless claims update encouraged the bears to make an appearance following last night’s very bullish run. The 10-year yield has nudged lower as bond traders are a little nervous about the health of the economy. WTI is down over 3% and the energy is trading sub $88.00. The sharp fall in oil reflects the fears about a slowdown in global growth.

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