The pound was up on Wednesday against a weaker dollar ahead of the Bank of England’s monetary policy meeting. The central bank will likely hike borrowing costs again – this time at a quicker pace.
Money markets are currently pricing in more than a 90% chance of a 50 basis point rate hike – double the size of the previous six consecutive rises – at the gathering of policymakers to address record-high inflation.
Survey data published on Wednesday confirmed activity in Britain’s services sector expanded last month at the slowest pace in 17 months when the national lockdown was still in full force.
The S&P Global/CIPS UK services PMI fell to 52.6, down from 54.3 in June and lower than a preliminary estimate of 53.3 as the economy wrestled with runaway inflation.
Tim Moore, S&P Global Market Intelligence’s economics director observed that decreased levels of discretionary spending from consumers and companies’ efforts to limit expenses due to rising inflation have both added to a squeeze demand.
Fed officials united on hiking rates
The dollar was subdued on Wednesday but clung to most of its gains from the previous day when hints at aggressive interest rate hikes gave it a lift.
Federal Reserve officials were out in force on Tuesday, making a united stand on the need to lift rates to a level that will curb economic activity enough and unwind the highest inflation in four decades.
One of them was Chicago Fed President Charles Evans, who told reporters on Tuesday that if inflation does not slow, he will back a supersized move: “If you really thought things weren’t improving … 50 (basis points) is a reasonable assessment but 75 could also be okay. I doubt that more would be called for,”
US-China tensions over Taiwan also lent the dollar support this week after House of Representatives Speaker Nancy Pelosi visited the country – the highest-level US visit there in 25 years. The resulting geopolitical frictions have boosted safe-haven demand for now.
Looking ahead
The BoE announces its latest interest rate decision on Thursday following the conclusion of its July meeting of Monetary Policy Committee members – with a hike nailed on but the size open for debate.
More Fed officials have speaking engagements on Thursday, including Governor Jerome Powell, who said last week the central bank might consider another “unusually large” rate hike at its September policy meeting.
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