Bank of England Meeting Offered Little Surprises
The Bank of England confirmed their dovish stance during their last week’s meeting by leaving interest rates and level of asset purchases unchanged. BoE officials and Governor Bailey voted unanimously to keep interest rates at an ultra-low level of 0.1% and maintain bond purchases at a cumulative GBP 895 billion (U$ 1.2 trillion) by the year end. This decision comes on the back of Prime Minister Johnson announcing a one-month extension of the UK’s country-wide lockdown. The country, once praised for their successful vaccine rollout, is now struggling with the rapidly spreading delta variant among the young and unvaccinated.
The BoE’s dovish comments mark a clear divergence in central bank policy stance. While no firm policy change has been introduced on either side of the Atlantic,the Federal Reserve Bank of the US has started discussing the tapering of asset purchases and brought the date of a potential rate hike forward by a year. This contrasts with comments from the ECB and BoE; both Lagarde and Bailey are worried about economic uncertainty and the risk of a policy mistake as the economic data has been volatile. Noise in the short-term data, especially around inflation and unemployment, have left central bankers with little choice but to wait.
Measured against the USD, the pound shed 33 basis points on the day of the announcement but closed the week up half a percentage point near 1.3870. The pound has been trending lower on the daily chart with momentum indicators signaling a further move lower. Key long-term support has formed near 1.3800 while 1.3900 is likely to offer a strong resistance. The weekly chart of GBPUSD is still looking bullish, but the momentum is clearly weakening.First quarter GDP data for the UK is published this week and the consensus expects a contraction of -1.5% on a quarter-on-quarter basis. This means the United Kingdom is in a technical recession with the economy contracting for two consecutive quarters. The pound is likely to be forced to retreat lower with limited positive catalysts on the horizon to support the economy and the currency.
Upcoming OPEC Meeting Might Push Oil Higher
OPEC and its allies are gathering for their monthly meeting this Thursday. With oil futures currently near $74 bpd levels, there is plenty to be optimistic about. Data from the US is showing that the country has mostly re-opened with California and New York lifting most COVID-19 related restrictions. TSA data shows there were roughly around 2 million American travelers per day passing checkpoints in June 2021, still short of the 2019 numbers of 2.4 million. However, these numbers have recovered strongly when looking at the 0.5 million travelers per day seen in 2020. The European Union, which is still around two months behind in terms of vaccination and economic recovery, has implemented a union-wide digital vaccination passport, which allows fully vaccinated residents to travel quarantine-free.
On the flipside, stubbornly high infection rates in Brazil and India, as well as the rapidly spreading delta variant, might force the cartel to be cautious. After the historic event in 2020 when oil futures dipped below zero, OPEC+ is likely to take measured steps before increasing production from current levels. Around 40% of the production cuts introduced in 2020 have been restored, and the cartel is under pressure from countries such as India to increase supply even more as the global economy is thirsty for oil.
US equity markets were red hot last week withS&P 500 index gaining 2.74% and hitting an all-time high of 2,480.69. Technology-heavyNasdaq-100 was up 2.1% , also closing at a record high of 14,345.18. Value and small-cap focused Russell 2000 jumped the most among major indices , rising 4.32%. The USD, measured as DXY, shed 51 basis points to $91.8. A weaker dollar lifted gold by a percentage point to 1,781.65. Oil jumped 3.6% ahead of the OPEC meeting.
Have a great trading week ahead!