The pound is trading higher again this morning with the GBPUSD posting yet another 10-month high. This rise has weighed on the FTSE 100 somewhat, with the benchmark lower by around 15 points at the time of writing.
UK services show marginal improvement
The third survey in as many days on the state of specific sectors within the UK economy has show a slightly better than expected reading for the services industry, with the purchasing managers index (PMI) rising to 53.8. This print continues the run of solid data points here and shows a steady pace of growth in what is by far and away the biggest sector for the UK economy. With the manufacturing number on Tuesday also beating expectations, overall the signs remain fairly positive for the economy despite the political backdrop remaining highly unpredictable. According to the survey, firms continue to cite Brexit uncertainty and a squeeze on household spending as dampening factors, with the latter coming about due to the pace of inflation outstripping wage growth. The release was met warmly in the markets with the GBPUSD rising by a little less than 50 pips to trade above its recent highs.
Super Thursday for BoE to drive UK assets going forward
Despite this week’s PMI data being mildly supportive of the pound, the currency will likely be far more sensitive going forward to news from Threadneedle Street later today when the Bank of England (BoE) announces its latest monetary policy mix. Even though the PMIs serve as the most widely-viewed leading indicator of economic activity, their importance to the markets has been usurped in recent months by inflation readings. The consumer price index (CPI) holds the key here and after rising to 2.9% year-on-year for the month of May there were growing calls from within the rate-setting committee of the bank to raise rates at their last meeting.
Last meeting’s dissent possibly overplayed
A reduced panel of eight members saw three dissent against the decision to keep rates at record lows of 0.25% - the greatest numbers of dissenters since May 2011. With only eight votes this meant a razor thin majority won the day as it would have only taken one more to dissent to see an even 4-4 split. However, the internal politics of the panel may have changed since then with one of the dissenters (Forbes) ending her term, as was previously scheduled, and being replaced by Tenreyro who is believed to be more dovish in her stance. With clear divisions within the MPC as far as views on interest rates are concerned the vote today could be key, with consensus expectations being that both Mccafferty and Saunders will dissent once more.
Drop in CPI unlikely to change BoE stance
An unexpected drop to 2.6% in the most recent CPI reading has eased the pressure on the central bank somewhat, but this still remains significantly above the 2.0% threshold the bank is mandated with keeping inflation below. Having said that, Governor Carney addressed this fall in the CPI as “inline with our forecasts” and therefore it is unlikely to have held to greater sway over today’s decision making process. Given the extraordinary measures used this time last year to support the economy in the wake of the panic that ensued after the Brexit vote, Governor Carney has stated a tolerance for above target inflation. However this tolerance is said to be limited and should today’s inflation report reveal further expected price rises then the market expectations for the time of a first rate hike will become much shorter. This would likely see further upside in the pound and could well drive the GBPUSD back to the 1.34-1.35 level.