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• BoE meets on Thursday with a rate cut firmly on the cards
• Data has been positive but doves in control of the committee
• Pound could suffer on Thursday but still favoured against the euro
• Rate announcement at 11.00 GMT with the press conference held 30 minutes later

The Fed gathering matters for the BoE

The Bank of England meets on August 1, the day after the Fed meeting that it is not currently expected to produce a surprise rate cut or a dovish shift. Assuming this expectation is confirmed, BoE members will probably face a true dilemma on whether to cut rates for the first time since March 2020 or postpone the decision for September, when the Fed will probably be closer to announcing its own rate cut.

Data has been positive despite the 2% headline CPI

Going into this meeting, BoE members will check if the data justifies a rate cut. Considering the tight labour market, average earnings growth continuing to print above 5%, and the recent PMI surveys pointing to consistent growth in both the services and manufacturing sectors, then the overall picture is not overly pessimistic. In addition, the housing sector could be also turning the corner, thus sending another positive signal for the growth outlook.

However, the doves would probably focus on the headline inflation rate dropping to 2% in the past months. The hawks’ counter argument would be the elevated core CPI rate, which remains stuck above 3.5%, and the much talked about services inflation printing at 5.7% in June.

Despite the obvious deceleration seen in these inflation indicators since the 2023 highs, the current levels are probably still too high for the hawks’ liking. If one adds up the fact that the producer price index indicator has been edging higher lately, potentially signaling a buildup of inflationary pressures down the line, then the current set up is probably incompatible with a central bank on the brink of a rate cut.

Quarterly forecasts to tip the balance in favour of a cut?

However, the inherent dovishness of the BoE and the quarterly forecasts are likely to swing the votes in favour of a 25-bps rate cut. In May, the BoE lowered its inflation forecasts, seeing inflation at 2.6% in one year's time and 1.9% in two years' time. A downward revision to these forecasts would clearly support the expected rate cut, despite the data being mostly positive.

Importantly, Governor Bailey appears to have the necessary votes to get the rate cut through the committee. However, governors are fond of getting their decisions approved with the largest possible support, with the market still remembering the former Governor Mervyn King being outvoted several times during his tenure.

Putting everything together, the market is assigning a 63% probability for a 25-bps rate cut on Thursday with the focus being on the hawks’ stance. They have been relatively quiet lately, which means that the possibility of being forced into a rate cut without being absolutely on board is gaining ground. However, Governor Bailey has to be extra careful and avoid the development of a rift within the committee, similar to the ECB one.

The pound could suffer on Thursday

The pound has greatly benefited from the euro’s underperformance since the start of 2024. The latest leg was a combination of the political unrest in both Germany and France, and the UK finally returning to political stability.

A surprise BoE rate cut on Thursday could dent the pound’s recent momentum, especially if Governor Bailey appears very dovish at the press conference and essentially points to another rate move in September. However, considering the continued weakness seen in the euro area data and fact that the ECB is on course for another rate cut in September, the pound is still positioned well against the euro in the medium term.

Markets

A slew of European data hit the wires today and after wrapping up this report some more are scheduled for release in the US (JOLTS, consumer confidence). GDP Q2 growth numbers were due in Hungary and the Czech Republic (see below), in core countries including Germany & France and the European periphery (Spain & Italy). The outcomes varied with France posting a bigger-than-expected expansion (driven by public sector expenditures as well as exports) but Germany unexpectedly contracting by 0.1% q/q. Italian growth was perfectly in line with the 0.2% consensus estimate while Spain continued its remarkable run of growth by adding 0.08% q/q (0.5% expected), the same pace as in Q1. Also featuring the economic calendar were several national July CPI numbers ahead of the European-wide figure tomorrow. Picking up where we left, Spanish inflation dropped more than expected, 0.7% m/m, pushing the y/y measure from 3.6% to 2.9%. Core CPI (non-harmonized) came in at the expected 2.8% y/y. Belgian (non-harmonized) inflation quickened from 0.22% to 0.71% in July. Headline CPI nevertheless eased slightly to 3.64% while the core gauge rose for a second month straight to 3.04%. German HICP, lastly, topped estimates marginally. Prices rose 0.5% m/m, thereby pushing the y/y figure to 2.6%.

All in all the data suggests EMU inflation should more or less come in as expected or perhaps slightly above consensus. Either way, we do not expect a major market impact. We’re not seeing one today either. The variety of the numbers makes unidirectional trade bets tricky and there’s still a lot of event risk ahead (BoJ, Fed, BoE, payrolls …). The euro whipsawed with EUR/USD temporarily rising to a day’s high of 1.0835 before turning south again around noon. The pair tested the 1.08 figure. Sterling trades marginally in the defensive, catching a breather after Monday’s intraday surge. The Japanese yen does suffer from some nerves going into tomorrow morning’s (our time) Bank of Japan policy meeting. USD/JPY’s bottoming out process is gathering momentum with the pair now changing hands around the 155 barrier. EUR/JPY is also up (167.6). European yields displayed traded choppy but eventually trade slightly lower (<2 bps) on the day. US yields join the gentle path down but compared to what we’ve seen last week, moves are insignificant. The first technical support zones remain under stress though.

News & Views

Central-European growth in the second quarter of the year disappointed. The Czech Republic’s economy expanded by 0.3% q/q, less than the 0.5% expected to be up 0.4% in yearly terms. It nevertheless marked a quickening from the 0.2% in Q1. Details are not available yet but the Czech Statistical Office said quarterly growth was supported by increasing private consumption whereas demand from abroad had a negative influence. The Hungarian economy printed a 0.2% decline, greatly missing estimates for a 0.5% expansion. The y/y figure therefore came in at a modest 1.5% only vs the 2.3% anticipated. Here, too, details lack but according to the Hungarian Central Statistical Office, contributions (in y/y terms) from construction and real estate were partially offset by a decrease in value added by the heavyweight industry. Both Czech and Hungarian swap yields promptly dropped in the wake of the release. Losses for the former rack up to 10 bps at the front. Swap yields in Hungary tank a whopping 14 to 27 bps in a bull flattener move. The Czech koruna barely lost ground, contrasting with his Hungarian regional peer. EUR/CZK stabilized near recent highs south of 25.5. It has been camping around those levels ever since a CNB policymaker did not rule out another 50 bps rate cut at this week’s (Thursday) policy meeting. EUR/HUF rose towards he 395 barrier today. The forint has been losing ground after hitting the 390 support zone Friday two weeks ago. A technical EUR/HUF rebound then coincided with risk sentiment taking a turn for the worse last week.

Graphs

EUR/HUF: forint taken off guard by unexpected economic contraction in Q2 of the year

German 2-yr yield: rapid decline eases but technical picture remains shaky

USD/JPY: yen is getting nervous ahead of tomorrow’s BoJ meeting

EuroStoxx50: stock sell-off takes a breather after hitting key support and as calm returns on bond markets

US Conference Board Consumer Confidence rose from 97.8 to 100.3 in July, above expectation of 99.8. Present Situation Index fell from 135.3 to 133.6. But Expectations Index rose from 72.8 to 78.2. Nevertheless, Expectations reading below 80 usually signals a recession ahead.

"Confidence increased in July, but not enough to break free of the narrow range that has prevailed over the past two years," said Dana M. Peterson, Chief Economist at The Conference Board.

"Even though consumers remain relatively positive about the labor market, they still appear to be concerned about elevated prices and interest rates, and uncertainty about the future; things that may not improve until next year."

Full US Conference Board consumer confidence release here.

AUDUSD remains in extended consolidation around the base of thick daily cloud (0.6538), and above pivotal Fibo support at 0.6528 (61.8% of 0.6362/0.6798), following a steep fall in past nine days.

Bears are taking a breather on stretched daily studies, but remain in play (strong negative momentum, MA’s in full bearish configuration and creating a number of bear crosses) and look for firm break through significant supports at 0.6538/28, which will unmask targets at 0.6500/0.6465 (round-figure/Fibo 76.4%).
Upticks so far remain below upper pivot at 0.6586 (200DMA).

Markets await release of US Consumer confidence and JOLTS data for fresh signals.

Res: 0.6568; 0.6586; 0.6603; 0.6631.
Sup: 0.6528; 0.6500; 0.6465; 0.6407.

Daily Pivots: (S1) 153.25; (P) 153.80; (R1) 154.58; More...

Intraday bias in USD/JPY stays neutral at this point. Further decline is in favor as long as 155.36 support turned resistance holds. On the downside, decisive break of 151.89 resistance turned support will argue that large scale correction is underway to 148.66 fibonacci level. Nevertheless, break of 155.36 will turn bias back to the upside for stronger rebound to 55 D EMA (now at 157.06).

In the bigger picture, considering the depth and momentum of the current decline, 161.94 should be a medium term top already. Fall from there is seen as correcting the whole rise from 127.20 (2023 low) at least. Break of 151.89 will pave the way to 38.2% retracement of 127.20 to 161.94 at 148.66. Risk will now stay on the downside as long as 55 D EMA (now at 157.06) holds, in case of rebound.

Daily Pivots: (S1) 0.8831; (P) 0.8851; (R1) 0.8882; More…

Intraday bias in USD/CHF stays neutral and consolidations from 0.8776 could extend. Further decline is expected as long as 0.8923 resistance holds. On the downside, break of 0.8776 will resume the fall from 0.9223 to 61.8% retracement of 0.8332 to 0.9223 at 0.8672 next. However, break of 0.8923 will turn bias back to the upside for stronger rebound instead.

In the bigger picture, with 0.9243 resistance intact, medium term outlook in USD/CHF is neutral at best. For now, more sideway trading is likely between 0.8332/9243. However, firm break of 0.9243 will indicate larger bullish trend reversal.

Daily Pivots: (S1) 1.0793; (P) 1.0831; (R1) 1.0860; More.....

EUR/USD's fall from 1.0947 is in progress and intraday bias stays on the downside. Sustained break of 55 D EMA (now at 1.0815) will argue that whole rebound from 1.0601 has completed with three waves up to 1.0947. Deeper decline should then be seen to 1.0601/0665 support zone next. Nevertheless, break of 1.0869 minor resistance will bring retest of 1.0947 instead.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern that's still be in progress. Break of 1.1138 resistance will be the first signal that rise from 0.9534 (2022 low) is ready to resume through 1.1274 (2023 high). However, break of 1.0665 support will extend the correction with another falling leg back towards 1.0447 support.

Daily Pivots: (S1) 1.2816; (P) 1.2852; (R1) 1.2898; More...

No change in GBP/USD's outlook and intraday bias stays on the downside. Decisive break of 55 D EMA (now at 1.2779) will suggest that rise from 1.2298 has completed with three waves up to 1.3043 Deeper fall would be seen to 1.2612 support and below. On the upside, above 1.2936 resistance will bring retest of 1.3043 resistance instead.

In the bigger picture, corrective pattern from 1.3141 medium term top (2023 high) could have completed with three waves to 1.2298 already. This will now remain the favored case as long as 1.2612 support holds. Firm break of 1.3141 will target 61.8% projection of 1.0351 (2022 low) to 1.3141 from 1.2298 at 1.4022. However, break of 1.2612 support argue that this corrective pattern is extending with another falling leg.

Overall trading in the forex markets remained relatively subdued today. Dollar continues to hold the top position, despite the absence of clear follow-through buying momentum. Investor caution is also evident in US stock futures, which are moving within a tight range. Any movement in the US markets is likely to be temporary today, as traders are holding off on major bets until tomorrow's FOMC rate decision, looking for clear guidance on a September rate cut.

Elsewhere in the forex markets, Euro remains sluggish despite stronger-than-expected Q2 GDP data and German CPI figures. It is also starting to face selling pressure against Swiss Franc as this week's recovery loses steam. British Pound is also soft, with some traders guarding against a dovish rate cut from BoE on Thursday.

Yen and Australian Dollar are also on the weaker side, with key events scheduled for the upcoming Asian session. For Australian Dollar, Q2 CPI data will be crucial for RBA's decision on whether another rate hike is needed to curb inflation. Australian Dollar will also be influenced by domestic retail sales data and PMIs from China. As for Yen, it is anticipated that BoJ will outline its plan to taper bond purchases, but there is uncertainty over the announcement of an additional rate hike.

Technically, AUD/JPY is sitting slightly above clear cluster support level of 99.32, with 55 W EMA (now at 99.33). Decisive break of this level will strengthen the case that fall from 109.36 is already correcting the whole up trend from 59.85 (2020 low). That would set the set the stage for deeper medium term fall to 38.2% retracement of 59.85 to 109.36 at 90.44. It's make-or-break time for AUD/JPY in the upcoming Asian session.

In Europe, at the time of writing, FTSE is down -0.17%. DAX is up 0.64%. CAC is up 0.60%. UK 10-year yield is down -0.019 at 4.033. Germany 10-year yield is down -0.010 at 2.352. Earlier in Asia, Nikkei rose 0.15%. Hong Kong HSI fell -1.37%. China Shanghai SSE fell -0.43%. Singapore Strait Times fell -0.07%. Japan 10-year JGB yield fell -0.0318 to 0.997, back below 1% mark.

Eurozone GDP grows 0.3% qoq in Q2, above expectation 0.2% qoq

Eurozone GDP grew 0.3% qoq in Q2, better than expectation of 0.2% qoq. EU GDP also grew 0.3% qoq. Comparing with the same quarter a year ago, Eurozone GDP grew 0.6% yoy while EU grew 0.7% yoy.

Among the Member States for which data are available , Ireland (+1.2%) recorded the highest increase compared to the previous quarter, followed by Lithuania (+0.9%) and Spain (+0.8%). The highest declines were recorded in Latvia (-1.1%), Sweden (-0.8%) and Hungary (-0.2%).

The year on year growth rates were positive for eight countries and negative for three.

Swiss KOF falls to 101, signals moderate growth ahead

Swiss KOF Economic Barometer fell from 102.7 to 101.0 in July, missing the expected 102.6. This drop indicates that the Swiss economy is likely to continue growing at a "rather moderate pace" in the near future, according to KOF.

The decline, while not unanimous across all indicators, is "very widely visible". The outlook for both foreign and consumer demand is worsening. Moreover, sectors such as hospitality, construction, other services, and manufacturing showed negative developments. However, financial and insurance services sector bucked the trend, showing an increase and "resist the widespread downward tendency".

Japan's unemployment rate falls to 2.5%, job availability declines

Japan's unemployment rate fell to 2.5% in June, down from 2.6%, outperforming expectations of being unchanged at 2.6%.

The number of employed persons reached 68.22mmarking an increase of 370k compared to the same month last year. This represents the 23rd consecutive month of employment growth and the highest number since comparable records began in 1953. However, the number of unemployed persons also saw an increase, rising by 20k from the same month last year to 1.81m marking the third consecutive month of increase.

In separate data, the Ministry of Health, Labor and Welfare reported that the job availability ratio fell by 0.01 point from June to 1.23. This marks the third consecutive month of decline in the ratio, indicating that there are now 123 jobs available for every 100 job seekers, down slightly from previous months.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2816; (P) 1.2852; (R1) 1.2898; More...

No change in GBP/USD's outlook and intraday bias stays on the downside. Decisive break of 55 D EMA (now at 1.2779) will suggest that rise from 1.2298 has completed with three waves up to 1.3043 Deeper fall would be seen to 1.2612 support and below. On the upside, above 1.2936 resistance will bring retest of 1.3043 resistance instead.

In the bigger picture, corrective pattern from 1.3141 medium term top (2023 high) could have completed with three waves to 1.2298 already. This will now remain the favored case as long as 1.2612 support holds. Firm break of 1.3141 will target 61.8% projection of 1.0351 (2022 low) to 1.3141 from 1.2298 at 1.4022. However, break of 1.2612 support argue that this corrective pattern is extending with another falling leg.

Economic Indicators Update

• GBPCAD stabilizes near 3-year high, at the top of a bullish channel
• Technical signals flag weaker sessions ahead; bears eye 1.7700 level

GBPCAD is in the fifth week of gains, having exponentially risen to 1.7849 last week– the highest level reached since March 2021.

The pair has been on the sidelines this week, retaining marginal gains so far, with the RSI and the MACD signaling growing appetite for selling as the former has changed trajectory to the downside after peaking above its 70 overbought level and the has retreated below its red signal line.

If the bears drive the price below the 1.7700 level and beneath the 20-day simple moving average (SMA), the 50-day SMA coupled with the tentative support trendline drawn from April’s low might attempt to pause the sell-off within the 1.7433-1.7500 territory. The 23.6% Fibonacci retracement of the September-July upleg is adding extra credence to the region. Hence, a violation there could upset traders, leading to a swift bearish correction towards the 38.2% Fibonacci of 1.7285.

In the big picture, the pair seems to be trading within a bullish channel with support at 1.7135 and resistance at 1.7895. A decisive rally above the channel could last till the 1.8000 psychological number or even higher at 1.8125, where the resistance line from December 2022 is placed.

To sum up, GBPCAD seems to have become more sensitive to bearish developments after unlocking a three-year high, though only a close below 1.7000 could bolster selling appetite, whilst an outlook deterioration could happen lower and beneath 1.7433.