Bank Of England Should Take Measures
InstaForex Group | Jul 01, 2021 01:40AM ET
The other day, the situation on the market was quite strange. Since the beginning of the European session, the pound sterling was rising and then stopped for a short period of time amid the publication of the flash data on the UK business activity. Notably, the growth was unexpected, as analysts had predicted a drop in the all PMI indices.
However, the real data turned out to be even worse. In particular, the UK manufacturing PMI declined to 61.7 points from 62.9 points against the forecast of a drop to 62.5 points. The services PMI slumped to 64.2 points instead of 64.5 points compared to 65.6 points in the previous period. As a result, the composite PMI slid to 61.7 points from 62.9 points. Analysts had foreseen a smaller decrease to 62.7 points.
Against the background, the pound sterling should have fallen. However, it showed short-lived stagnation and resumed gaining in value. Thus, since the beginning of the trade, the British pound added 70 pips. This is quite a good performance amid such weak PMI figures.h2 UK Composite PMI
In fact, the pound sterling was just following its counterpart, the euro. At the same time, after the publication of the US statistics, the currencies’ dynamic surprised traders. Firstly, the US reported on its business activity. The figures were well below the forecast, which predicted a drop. Only the US manufacturing PMI increased to 62.6 points from 62.1 points, whereas economists had expected a drop to 61.0 points.
However, the rise was offset by a slump in the services PMI to 64.8 points from 70.4 points. Economists had foreseen a less significant decline to 69.0 points. As a result, the composite PMI tumbled to 63.9 points instead of 67.0 points from 68.7 points. After the publication, the market got stuck. Curiously, 30 minutes later, the US dollar showed a confident jump. The US currency also ignored a new home sales report, which revealed a fall of 5.9%.
Although the US statistical data was absolutely negative, the greenback continued gaining in value. As a result, the pound sterling inched down, but the situation defies logic. Of course, we may try to explain such a state of affairs by comments provided by the Fed’s representatives. However, in fact, Michelle Bowman delivered a speech an hour before the greenback’s rise. In addition, the regulator’s comments on the current situation were published after a surge in the US dollar. Notably, the US Fed did not announce anything new. To sum up, investors are puzzled, thus creating perfect conditions for speculations.
h2 US New Home Sales
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However, market participants should take into account that today, the Bank of England will hold a meeting. Not so long ago, the US Fed announced its plans to raise the key interest rate. That is why traders suppose that the BoE may also take such a decision. The regulator will hardly raise the key interest rate right now, but it may drop a hint about it. Nevertheless, there are concerns that the BoE will remain its policy unchanged. Notably, unlike the ECB and the US Fed, the Bank of England has room to maneuver.
The fact is that in the UK, inflation rate is significantly lower than in Europe and the US. What more, its growth pace is quite slow. That is why the BoE does not have to take radical measures and it may choose the wait-and-see approach. Of course, market participants will consider this as a negative factor amid the Fed’s actions. This, in turn, will lead to a further drop in the pound sterling.
Yesterday, the pound/dollar pair touched the important price level of 1.4000. As a result, the volume of long positions fell and the pair slid.
The market dynamic became slower compared to the high volatility logged during the period from June 16 to June 22. Speculative activity remains high that is proved by sudden changes in the price.
Judging by the current price location, we see that it is hovering within the psychological area between the levels of 1.3950/1.4000/1.4050.
On the daily chart, we can see the upward movement, but there are no significant changes at the moment.
If the price fixes below 1.3920, the correction may end and the pair is likely to slide towards 1.3870-1.3800.
According to the alternative scenario, the pair may consolidate above 1.4000 to continue gaining in value.
In terms of complex indicator analysis, we see that technical indicators are providing buy signals on the one-minute and one-hour time frames. At the same time, on the daily chart, the downtrend still prevails.
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