Daily Market Outlook, August 5th, 2021

Overnight Headlines

Today’s Bank of England meeting is not expected to lead to any immediate changes in policy. Keeping Bank Rate at a record low of 0.10% is likely to be a relatively straightforward decision for the Monetary Policy Committee (MPC). However, there will be much more debate over the QE programme. Recent speeches from external MPC member Saunders and Deputy Governor Ramsden have signaled some concern about the ongoing rise in inflation. So at least one, and possibly both, may vote to curtail the current £150bn tranche of asset purchases underway.

The latest economic projections in the Monetary Policy Report (MPR) are likely to show a much higher peak in inflation relative to the May MPR, with annual CPI inflation likely to be forecast well above the 3% mark later this year. However, as it will probably still be assumed that the rise is ‘transitory’, the medium-term projections are likely to be little changed with inflation seen easing back down to be at, or close to, the 2% target in 2-3 years’ time. That should justify the majority of the MPC remaining in wait-and-see mode and the completion of the asset purchase programme.

While policy tightening remains some way off, it is possible that the BoE will provide some preliminary guidance based on their ongoing review. The previous guidance that the balance sheet (stock of QE) will not be run down until interest rates reach at least 1.5% has been criticised by BoE Governor Bailey as being too prescriptive. The MPC may take the opportunity to give some new guidance on the ‘sequencing’ of future changes to policy. If they do so, just how much detail will be provided remains highly uncertain. It is feasible that there could be a shift to a more flexible framework to reflect the current policy mix. That might allow the MPC to move between higher rates and balance sheet unwinding, and to use the latter at a much earlier stage of the tightening process than under the existing guidance.

(Hedging effect can often draw spot toward strikes pre expiry if nearby)

USDJPY - 111.40/50 776m. 109.90/110.00 937m. 109.70/80 652m. 109.50 1.27bn (659m P). 109.20/30 1.49bn (881m P). 109.00/10 1.29bn (839m C). 107.50 400m.
EURUSD - 1.2000 629m. 1.1920/30 736m. 1.1900/10 722m. 1.1880/90 1.40bn (729m P). 1.1860/70 2.76bn (1.56bn C). 1.1840/50 1.55bn (1.16bn P). 1.1820/30 1.46bn (938m P). 1.1790/1.1810 2.21bn (1.43bn P).
GBPUSD - 1.3780/1.3800 542m.
AUDUSD - 0.7480/0.7500 1.11bn (577m P). 0.7350 455m.
USDCAD - 1.2640/50 864m. 1.2540/50 1.59bn (929m C). 1.2520/30 831m. 1.2470 669m.
EURGBP - 0.8550/60 540m. 0.8500 486m.
USDCHF - 0.9200 400m.
AUDJPY - 82.20 464m. 80.50 619m. 78.50 450m.
USDZAR - 14.20 455m.
CADJPY - 88.00 555m. 86.00 650m.
USDHKD - 7.80 787m.
USDCNH - 6.49 1.18bn (665m P). 6.47 700m. - Source: CT News

EURUSD Bias: Bearish below 1.1950 Bullish above

GBPUSD Bias: Bearish below 1.40 Bullish above.

USDJPY Bias: Bullish above 109 Bearish below

AUDUSD Bias: Bearish below .75 Bullish above