At Least The UK Service Sector Kept Its Head Up

This morning we mainly concentrated on the UK services report since it was the only decent data release so far. It gained additional attention today because the Bank of England is holding their meeting. It is scheduled to start in a  little while, before I finish this midday brief actually.

The PMI data dived last month, so there was fear regarding this month´s numbers. The manufacturing report on Tuesday improved the sentiment as it came out higher than expected. However, the construction numbers yesterday brought us right back to where we were the week before when it dived below 52 PMI points for the first time in a long long time.

Although the services PMI data this morning held up well and since it makes up about 4/5^th of the UK economy, it relaxed the market somewhat and the Pound rallied about 40-50 pips across the board.  

BOE And Mark Carney

This is not the time to smile at the BOE

The BOE meeting hasn’t started yet, but the MPC preview suggests that the BOE looks outside of the box when it comes to inflation. That makes sense and I have mentioned it before – the BOE is stuck between a rock and a hard place. The economy is showing signs of weakness and Brexit looms around the corner, while inflation is surging.

Although, in the last reading inflation cooled off a little.

The BOE should overlook inflation and concentrate on economic growth. Forget about rate hikes then, since growth is faltering in the UK.

The BOE statement was just published and the rates are unchanged as expected. The votes to hike interest rates declined to just 2 against the 6 votes to keep rates unchanged. That´s down from 3 votes to hike rates in the previous meeting.

The inflation forecasts have also declined and the GBP rightfully took an 80 pips dive after the release. The 200 SMA on the daily forex chart held its ground. This moving average looked like a decent place to sell, but the USD weakness has been too intense, so it prevented us from opening a long term sell forex signal around there.

However, there might be another opportunity to sell this pair, because BOE chairman Mark Carney's press conference is coming up soon. His comments might cause a spike in GBP pairs which would be a good opportunity for GBP sellers.  

What Does BOE´s Carney Have To Say?

Mark Carney will soon hold a question & answer session with the press, but I don´t see any hopes for GBP bulls where we stand right now. There was a line in the BOE statement which said that “there should be 2 rate hikes instead of 1”, but that was priced in already by the market, so no one seems impressed.

In my opinion, he has no other option but to be dovish once again. He tried it last time but it didn’t work since inflation was surging and nearly hit 3% last month. But inflation has retreated a bit this month and the economic outlook seems a bit darker.

GBP/USD senses that and the decline continues to stretch further. Although, the main thing to watch for during his conference is his tone; we must distinguish whether he gives more importance to the economy or to inflation.

I think that he has no other option but to acknowledge the recent slowdown of the British economy and dismiss inflation, which is what the BOE MPC preview suggested. Chances are that GBP tumbles further.

Trade Idea: As I mentioned above, chances are that GBP falls further during/after Carney´s press conference, so if you see a spike, I´d suggest getting in short for a long term trade, if you can get in.   

That´s quite a reverse from the 200 SMA, but we did highlight this moving average earlier today

Update: Carney is live and he is being dovish. He´s saying that monetary policy can’t make up for Brexit which is obvious to anyone in their right mind (except for Theresa May). The UK economic slowdown is likely to have monetary policy consequences.

Are they shifting from hiking to cutting the interest rates? That´s what these comments sound like, but I don´t think that means that the BOE will cut interest rates tomorrow, it´s more like an option which is open for the BOE. GBP/USD is stretching further down, so maybe we won´t get a spike to start selling this forex pair, let´s wait and see.  

US Unemployment Claims And Non-Manufacturing PMI

There´s life outside of the UK and GBP for forex trades; the US unemployment claims and ISM non-manufacturing PMI are due to be released later on, so GBP/USD will be under the influence of this data as well.

Unemployment claims are expected to remain around current levels; even if they jump by a few thousand, I don´t see them have much effect on the Buck. Although, non-manufacturing PMI and factory orders might ruin things for USD traders if the actual numbers diverge too much from expectations.

I don´t see them giving the USD a definitive direction because tomorrow is the big day for the Buck. US average hourly earnings (wages & salaries), unemployment rate, non-farm employment change and trade balance are scheduled for release, so I don´t think anyone has the guts to take things too far today. However, it might make life too difficult for GBP/USD traders, so we must keep an eye on those numbers today as well.