Would BOE derail or accelerate GBP rally?

The immediate focus will be on UK fundamentals and the Bank of England’s meeting tomorrow...

The pound managed to climb to its best level since September 2016 against the US dollar today. That was despite news UK construction PMI came in weaker at 51.9 vs. 54.3 expected. In the US, the ADP private sector payrolls report came in at 178,000 compared to 187,000 expected. But the upward revision to June's figure (to 191K from 158K) meant that overall the ADP report was a touch better than expected. However, it didn’t help the dollar whatsoever. It is obvious that the dollar bulls are waiting for the official non-farm payrolls report and wages data on Friday before potentially stepping in. If these figures come in significantly above expectations then the dollar may make a meaningful comeback, else the cable’s rally will most likely continue.

But the immediate focus will be on UK fundamentals and the Bank of England’s meeting tomorrow. The UK services sector PMI will be released in the morning, expected to come in at 53.6 versus 53.4 expected. The result of this PMI is unlikely to sway the decision of the BoE, so any moves in the pound from this source is likely to be short-lived. Policymakers at the BoE are likely to keep interest rates unchanged in a 6-2 vote. But if there are more votes in favour of a rate rise and/or the BoE comes across as more hawkish than expected then the pound could surge higher, especially if the Inflation Report contains bullish GDP or inflation forecasts.

GBP/CHF one to watch

As well as the GBP/USD, some of the GBP crosses are also looking quite interesting to us, including GBP/CHF. Over the past week or so, the Swiss franc has been weaker than even the US dollar. With the GBP/CHF breaking and holding above the old swing high at 1.2635, and subsequently moving north of 1.2750 resistance level, the path of least resistance is clearly to the upside. If the GBP remains bid, any weakness in this cross could be short-lived. The first support level we are now anticipating a bounce from is at 1.2795/6, the high from Tuesday’s range. Further support levels are seen at 1.2750 and 1.2635, levels mentioned above. In terms of resistance, apart from the psychologically-important 1.30 handle, there is nothing significant until 1.3070, the earlier 2017 high. Given the recent developments, I think the GBP/CHF is heading to probe liquidity above that level in the coming days/weeks.  Any sustained move back below 1.2635 would render this bullish outlook invalid.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.