IFX Market Report: Wednesday 4th August 2021

With little price action on Tuesday, it was once again a rather quiet day for G10 FX. Cable traded flat on the day and GBPEUR made subtle gains to the upside. It is likely Sterling will continue to see little volatility until the upcoming Bank of England (BoE) meeting on Thursday. It has been reported that “economists broadly expect the Bank of England’s Monetary Policy Committee to raise its inflation forecasts… after two straight months of overshoots”. June’s CPI reading smashed expectations and represented the highest annual acceleration since May 2018. The UK central bank has projected that inflation will peak above 3% by the end of 2021 as the economy rebounds from its historic pandemic-induced decline in 2020.

Despite high inflation, investors should not anticipate a hawkish shift tomorrow, as “several major European banks are expecting the BOE to strike a cautiously optimistic tone while leaving its quantitative easing program and interest rate stance in place”. While many believe the BoE will maintain its QE program for the time being, the bank has been working since February on how to start tightening policy. Some economists believe it will “be among the first of the world’s main central banks to begin the process of weaning its economy off stimulus support.” The current guidance, dating back to June 2018, states that the BoE will not start to unwind QE, and will reinvest the proceeds of maturing gilts, until Bank Rate is near 1.5%. The BoE's benchmark Bank Rate at present is at a record-low of 0.1%, and its bond purchases, which began in 2009 during the global financial crisis, are approaching 40% of gross domestic product, double the share before the pandemic.

GBPUSD saw little volatility in the session yesterday – opening at 1.3894 and closing at 1.3893.

GBPEUR on the other hand made minor gains on the day. The pair started the session at 1.1700 and finished at 1.1715.

EURUSD in contrast made a loss yesterday. The pair opened at 1.1875 and closed at 1.1859.

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