Forex Today: BoE rate decision, key US data to keep volatility going
|Here is what you need to know on Thursday, August 1:
Following a volatile American session that featured the Federal Reserve's (Fed) policy announcements and Fed Chairman Jerome Powell's press conference, market attention shifts to the Bank of England's (BoE) rate decision on Thursday. In the second half of the day, weekly Initial Jobless Claims, second-quarter Unit Labor Costs and ISM Manufacturing PMI data for July will be featured in the US economic docket.
US Dollar PRICE This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Japanese Yen.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.45% | 0.58% | -2.47% | -0.08% | 0.31% | -0.99% | -0.80% | |
| EUR | -0.45% | 0.09% | -2.92% | -0.51% | -0.09% | -1.45% | -1.22% | |
| GBP | -0.58% | -0.09% | -3.05% | -0.60% | -0.19% | -1.52% | -1.31% | |
| JPY | 2.47% | 2.92% | 3.05% | 2.43% | 2.89% | 1.53% | 1.75% | |
| CAD | 0.08% | 0.51% | 0.60% | -2.43% | 0.43% | -0.93% | -0.69% | |
| AUD | -0.31% | 0.09% | 0.19% | -2.89% | -0.43% | -1.32% | -1.13% | |
| NZD | 0.99% | 1.45% | 1.52% | -1.53% | 0.93% | 1.32% | 0.21% | |
| CHF | 0.80% | 1.22% | 1.31% | -1.75% | 0.69% | 1.13% | -0.21% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
The Fed left its monetary policy settings unchanged following the July 30-31 policy meeting, as expected. In the post-meeting press conference, Chairman Powell noted that there was a "real discussion" about the case for reducing rates at this meeting. He added that a strong majority supported not moving rates at the meeting but said that a rate cut could be on the table in September. The US Dollar (USD) Index came under bearish pressure following these comments and lost 0.4% on a daily basis. Early Thursday, the index stages a technical rebound and trades modestly higher on the day above 104.00. Meanwhile, US stock index futures trade marginally higher following the risk rally seen on Wednesday. Finally, the benchmark 10-year US Treasury bond yield fluctuates above 4% after touching its weakest level since February with a daily loss of more than 2%.
The BoE is forecast to lower the policy rate by 25 basis points to 5%. There is, however, still a strong chance that the BoE could opt to maintain the bank rate. Hence, Pound Sterling's volatility could ramp up, depending on the BoE announcements and vote split. At 11:30 GMT, BoE Governor Andrew Bailey will speak at a press conference and respond to questions from the press. GBP/USD benefited srom the selling pressure surrounding the USD and registered small gains on Wednesday. The pair stays on the back foot early Thursday and was last seen trading at its lowest level in three weeks below 1.2800.
The Japanese Yen rallied against its major rivals following the Bank of Japan's unexpected decision to raise its policy rate on Wednesday. After losing nearly 2% on Wednesday, USD/JPY extended its slide and touched its lowest level since mid-March near 148.50 during the Asian trading hours on Thursday. Heading into the European session, the pair staged a rebound and was last seen trading little changed on the day at around 150.00.
EUR/USD posted marginal gains on Wednesday but failed to preserve its bullish momentum. The pair struggles to regain its traction in the European morning and trades in the red slightly above 1.0800.
After rising more than 1% on Wednesday, Gold extended its rally and gained 1.5% on Thursday. After touching a two-week-high of $2,458 in the Asian session on Thursday, XAU/USD went into a consolidation phase and was last seen trading little changed on the day near $2,445.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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