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Sterling Rebounds Ahead of BoE Meeting

David Becker
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www.iforex.com

Sterling rebounded from its lows after Markit released a stronger than expected PMI services data, which showed stronger than expected inflation in wage gains. This type of inflation can easily spill over into consumer prices as consumers now are gaining the power to pay a higher price for discretionary goods.

The UK PMI services came in better than expected at 58.6 and only fractionally down on April’s 58.7. More especially the report revealed rising wages and a consequential jump in operating costs, which suggests potential for domestically generated inflations is starting to appear, which will not go unnoticed by the more hawkish members of the BoE’s MPC. The composite PMI worked out at 59.1, off from 59.4 in April but still signaling continued brisk economic expansion.

The yield differential between the UK and the US moved in the UK’s favor but this could easily turn around on Friday when the US reports its non-farm payroll report. Cable popped nearly half a big figure from its pre-data after settling around 1.6725-30. The BoE’s MPC convenes for the June meeting today, announcing Thursday, and while this should be a non-event for markets, as no change and no statement are widely expected, there is a chance that one MPC member starts to vote in favor of hiking rates.

The currency pair held support near the recent lows at 1.6700, but was unable to break through resistance near the 10-day moving average at 1.6770. Although momentum on the current pair is negative, the trajectory of the MACD is turning. The relative strength index is turning higher with price action reflecting accelerating positive momentum while printing near 46, which is the middle of the neutral range.

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