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Will the BoE take interest rates higher?

PMIs set the US dollar moving

Services sector Purchasing Managers’ Indices from Europe and the United States were sufficiently adrift from forecast to send the dollar higher against the euro, twice. In the first move, investors marked down the euro; in the second, they bought the dollar.

Markit’s services and composite PMIs for the Eurozone in July were both higher than the previous month, at 59.8 and 60.2 respectively. The report’s heading boasted that “Eurozone grows at fastest rate since June 2006”, and in most circumstances it would have been enough to lift the euro. However, investors were in a mood to find fault, and because analysts had predicted even higher readings of 60.4 and 60.6, the market sent the euro a third of a cent lower against the dollar.

The downturn saw no follow-through and the euro had climbed back beyond its tipping point by the time the US PMIs appeared. When they did, rather than investors selling the euro, they bought the dollar. They had no issue with Markit’s assessment that it was the “softest rise in [US] business activity since February” but they got terribly excited about ISM’s when the “US services sector races to record high in July”. The dollar strengthened on every front, eventually winning the day with an average rise of 0.3%. It added a third of a cent against the euro and the pound.

 

Fed vice chairman keeps it moving

At the same time as ISM published its PMI data, Federal Reserve Vice Chairman Richard Clarida began a speech to the Peterson Institute, entitled “Outlooks, Outcomes, and Prospects for US Monetary Policy”. In it, he set the scene for higher interest rates.

Whilst in recent weeks several members of the rate-setting Federal Open Market Committee have expressed a preference for tighter policy, Mr Clarida is the most senior among them to do so. The main takeaway was an expectation that by the end of this year, the Fed will have provided guidance that rates will start to move higher in 2023.

At lunchtime it will be the turn of the Bank of England to manage expectations for monetary policy, albeit indirectly. Economists expect up to two members of the Monetary Policy Committee to vote for a wind-down of the bank’s asset purchase programme, as well as a 9-0 vote to keep interest rates unchanged. In his appearance half an hour later, it is possible that the governor could shed more light on the eventual path towards tighter policy, and whether asset sales might come before higher interest rates.

 

Nonfarm payrolls will shape expectations for the US economy

If today’s big economic event is the Bank of England’s monetary policy decision, tomorrow’s is undoubtedly the US employment report and, within it, the monthly change in nonfarm payrolls. Investors received one pointer yesterday, in the shape of ADP’s employment change number. They will hope to find another clue in today’s weekly jobless numbers.

ADP’s report of 330k new jobs in July was something of a disappointment, less than a third of the expected number. Today’s jobless claims do not directly affect tomorrow’s nonfarm payrolls, but they do provide colour, not least because they incorporate revisions to earlier weeks’ data. The Canadian employment figures come out tomorrow at the same time as the US employment report.

Much further down the pecking order of market influence, today brings the UK construction PMI and the balance of trade data from the States and Canada. On Friday, the Reserve Bank of Australia governor will answer questions from the House of Representatives Economics Committee, and Halifax will publish its house price index

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