Published: 26/07/2022 By ECAPSterling was one of the best performing currencies yesterday, which managed to rally back above the 1.20 level versus the broadly weaker US dollar. Most headlines on the UK economy have been rather doom and gloom recently, although with activity data holding up better than some of Britain’s peers, and with the Bank of England likely to raise rates by 50 basis point at their next meeting in early-August, the pound does still appear to be undervalued. There will be no major economic data releases out of the UK this week, which could lead to relatively rangebound trading. The view is that market participants will start to position themselves ahead of next Thursday’s MPC meeting, which is shaping up to be an important one for the UK currency. Should the BoE raise rates by 50 basis points, while signalling additional moves of the same magnitude are likely on the way during the rest of the year, then we may we a decent rally in GBPUSD from current suppressed levels.
The US dollar was a touch weaker against most of its major peers yesterday, with markets resigned to the likelihood that the Federal Reserve will raise rates by 75 basis points tomorrow evening. Investors had ramped up expectations in favour of a possible 100 basis point hike from the FOMC this month following the scorchingly hot US inflation print for June, released earlier this month. Since then, however, these bets have eased considerably amid signs of a deterioration in US economic activity data, notably Friday’s dismal PMI numbers from S&P. A 75 basis point hike is seemingly a done deal at this week’s FOMC meeting, suggesting limited room for a surprise. That said, investors will still be paying close attention to chair Powell’s comments on the state of the US economy and the Fed’s view on the size of additional hikes beyond the July meeting. Should the Fed indicate that additional 75 basis point moves are possible beyond this week, then the US dollar would likely rally. By contrast, rhetoric that hints at a possible return to smaller rate increases from the next meeting onwards would be perceived as dovish given current market pricing.