Dovish BoE still hikes the base rate

Despite a doom-laden set of predictions from the Bank of England in the statement issued following their interest rate hike, the Governor of the Bank of England, Andrew Bailey still announced a 50 basis point hike to bring the UK base rate up to 1.75%. That would seem an odd decision to make if Mr Bailey really does believe the UK is going to be in recession until the end of 2023 but the BoE is caught between rising inflation and slowing growth and they have to fall on one side of the fence or the other.

As is the UK central bank’s wont, they tend to side with the most pessimistic of outcomes but felt they had to be seen to do something about rampant inflation. If that inflation was caused by equally rampant consumerism, it would make sense but prices are rising due to external factors and they are rising around the world, not just in the UK, so I make no apology for remaining unconvinced by the likely efficacy of this hike in lowering inflation. Either way, Sterling had a volatile day but is back to roughly where it was before the BoE spoke. This morning’s headline rates are GBPUSD at $1.2160 but the GBPEUR rate is significantly lower at €1.1850. More of that is below. We have no significant UK data today, so look overseas for Sterling influencers (not the ones on TikTok or Insta though).

Euro gains on industrial production and ahead of US payrolls

German industrial production was much stronger than expected in the data released yesterday, monthly growth of 0.4%. The markets were expecting a contraction of 0.3%, so the swing in Europe’s largest industrial producer is very significant. That positive story was reinforced by 1.4% monthly growth in French industrial output and 7% annual growth in Spanish data. We saw the euro strengthen on the back of that news this morning, bringing the GBPEUR rate a cent lower at €1.1850 but in the short time since I wrote the previous section, that rate has bounced to €1.1875, such is the volatility in the market right now. The EURUSD rate also spiked on the news but the effect was much more muted. That pair is around $1.0235 this morning as nervous investors eye up the US employment report due this afternoon. The forecasts would suggest further USD weakness might ensure but I’ll cover that in more detail.

US employment report is today’s highlight

Today’s big-ticket item is the US employment report. The forecast for the nonfarm payroll growth for July is circa 250,000 fresh jobs, down from 372,000 jobs in June. It’s unlikely the unemployment rate will be affected by that small variation. That should remain at 3.6% and, as long as the data we see at 12:30 GMT matches these forecasts, the US dollar should be largely unaffected. However, any significant variation from these estimates will kick in further US dollar volatility. So dollar buyers and sellers should beware.

CAD awaits Canadian employment data

It will be largely overshadowed by US employment report’s release but Canada’s employment data is also due for release at 12:30 GMT. The markets are expecting the unemployment rate to edge slightly higher to 5% in the July data despite an expectation that we will see approximately 20,000 new jobs being created. As with the US data, any discrepancy between these forecasts and reality will impact the Canadian dollar. Having had a very volatile Thursday, due to the UK rate change, the GBPCAD rate is currently around CAD 1.5650,

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