Growing expectations of the increase in repo rate in August from 30% to 44% has inflated the GBP/USD quotes to a two-week high

The coming of summer has breathed new life into European currencies. Encouraged by the improvement in the macroeconomic statistics of the euro, the British pound and the Swiss franc dominate the market due to the growth of investors' hopes for the normalization of monetary policy. At the same time, the US dollar, on the contrary, ignores the positive effect of business activity in the non-production sector, the trade balance and the labor market. It is possible that the bullish factor is already priced in the quotations of dollar-based currency pairs, which causes participants of the market battles to gradually record profits.

The increase in the service PMI in Britain to a 3-month peak and composite PMI to the maximum mark since the beginning of the year was a balm on the wounds of GBP/USD bulls. At the same time, service providers reported a sharp increase in production costs, not only because of rising energy prices, but also because of the harsh labor market, which complicates the process of filling vacancies. Markit estimates that the current dynamics of business activity allows us to expect the economy to accelerate from + 0.1% in the first quarter to + 0.3-0.4% q/q in the second.

Dynamics of business activity in Britain


 
Source: Bloomberg.

Additional support for sterling was provided by data releases on consumer spending from Barclaycard and retail trade from BRC. The first indicator grew at the fastest pace since April 2017, the second - since January 2014. According to ING, the Bank of England will prefer to raise the repo rate earlier than investors expect due to the acceleration of wages, which, in turn, will keep inflation above the target of 2% longer than the regulator assumes. Indeed, a portion of strong macroeconomic statistics increased the chances of monetary policy tightening in August from 30% to 44%, which served as a good reason for the attack of the GBP/USD bulls.

The offensive enthusiasm of the pound fans is held back by the expectations of the Parliament's vote on Teresa May's plan for Brexit and the moderate pigeon rhetoric of MPC member Silvana Tenreiro. She stated that it takes a little more time to understand whether inflation can come to the target without the help of the repo rate raise. The approval of the Prime Minister's plan by the deputies will increase the likelihood of a soft exit of Britain from the EU and will support the pound. And, vice versa, in the event of a protest, May's retirement risks will increase.

Median estimate of more than 50 experts Reuters assumes that GBP/USD will be quoted at 1.33 a month later, six months later at 1.35 and, finally, a year later - at 1.41. At the moment, the sterling looks better. An additional support factor is the statistics: since 1975, the British currency closed June in the green zone against the US dollar in 26 out of 43 cases. In my opinion, the new positive from the macroeconomic indicators of the Foggy Albion, a favorable outcome of the vote in the parliament and the Fed's emphasis on leisurely normalization of monetary policy following the June meeting of the FOMC will push the GBP/USD quotes towards the upper limit of range 1,325-1,362 indicated in the previous article.

Pound is coming back to life

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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