Potential for big gains this week

Sterling ended the day unchanged against the U.S. Dollar yesterday, but it is widely believed there is a potential for big gains in the currency this week. According to yesterday’s PMI report, manufacturing activity grew at a faster pace in the month of July. While the British Pound did not receive a boost because the index rebounded from a two‐year low and export demand dropped for the fourth consecutive month, the overall improvement in manufacturing activity should keep the Bank of England optimistic about the outlook for the economy. As many believe the central bank is in no position to raise interest rates in 2015 (following Carney’s comments last week), this perspective will be important because their tone will be the main focus this week.

It will be a historic week for the pound because for the first time ever, the Bank of England will deliver its monetary policy announcement, release the minutes from the meeting and its quarterly inflation report at the same time on "Super Thursday". Forty‐five minutes later, BoE Governor Carney will hold a press conference. We know that the head of the UK Central Bank tends to maintain a hawkish bias. The big question is how many Monetary Policy Committee members will vote against keeping rates unchanged. Even if one shifts away from the consensus, it could be enough to drive sterling sharply higher.

The positive and negative economic data released on Monday had an almost completely counteractive effect on the euro causing no overall movement across the day. The strength caused by Italian and German manufacturing PMI, releasing above expectation, was quickly offset by the disappointing results of the Spanish and French releases. However, the difference in timings of the announcements and data seen elsewhere in Europe caused a range in the euro against sterling of over 0.4%.

Whilst Greece appears to be moving in a positive direction the economic outlook is still sketchy at best. Greece’s manufacturing sector reported its steepest drop in employment on records, which can be largely attributed to extremely low confidence in Greek business owners who reported the worst ever PMI reading at 30.2.

Monday also saw the Greek stock exchange finally open following a five week closure. After an initial collapse of 22.8% the Greek index clawed back some ground closing 16% lower than it opened. This gain later in the day can be partially attributed to the ban on short selling that was quickly imposed following the downward pressures seen in the morning.

ISM manufacturing PMI data for July came in weaker than expected yesterday at 52.7, raising concerns over whether the US economy is in a fit enough state to raise rates before the end of the year. GBP/USD recovered from intraday lows as the dollar weakened across the board following the announcement, but the pair failed to hold above the 1.56 (IB) mark, finishing the day ‐0.2% lower. Similarly, EUR/USD managed to shrug off the weak reading despite initial gains, ending the session near daily lows of 1.0950 (IB).

There are no major economic releases today, but do look out for factory orders at 14:00 which are expected to come in 2.8% higher than the previous month.