03.08.202215:22 Forex Analysis & Reviews: GBP/USD: on the eve of the Bank of England meeting

As follows from the final release of the S&P Global/CIPS report, published this morning, the Purchasing Managers' Index (PMI) in the UK services sector was revised downward to 52.6 in July (against the forecast of 53.3, preliminary estimate of 53.3). Previous values: 54.3, 53.4, 58.9, 62.6, 60.5, 54.1 (in January). The published data show a downward trend in business activity in this sector of the British economy. The service sector employs majority of the UK's working-age population and generates approximately 75% of GDP (financial services continue to be the most important part of the service sector).

"UK service providers reported their worst month for business activity expansion since the national lockdown in February 2021. Reduced levels of discretionary consumer spending and efforts by businesses to contain expenses due to escalating inflation have combined to squeeze demand across the service economy. The near-term outlook also looks subdued, as new order growth held close to June's 16-month low and business optimism was the second-weakest since May 2020," S&P Global/CIPS said in a report.

The manufacturing PMI (from S&P Global/CIPS) released earlier this week also fell short of the forecast, falling below the first estimate of 52.2. Previous manufacturing PMI values: 52.8, 54.6, 55.8, 55.2, 58.0, 57.3 (in January). There is also a negative trend here—business activity in this sector of the British economy is also declining, although it remains high (values above 50 indicate high business activity).

The S&P Global/CIPS composite PMI index for the UK was 52.1 in July against the expected 52.8 and the previous value of 52.8.

All of these are negative factors for the pound, economists, and Bank of England leaders on the eve of the bank's meeting on Thursday, indicating a relative deterioration in sentiment and business conditions in the country.

Nevertheless, these data are unlikely to affect the decision of the BoE to raise the interest rate once again. It is widely expected to be raised by 50 basis points (to 1.75%), which will be the most significant tightening of the bank's monetary policy since 1997. The leaders of the Bank of England will raise the interest rate, explaining their decision by the desire to curb inflation.

This decision will be published tomorrow at 11:00 (GMT). Also, at the same time, the minutes of the Monetary Policy Committee will be published, which contain information on the distribution of votes "for" and "against" the increase/decrease in the interest rate, and the report of the BoE on monetary policy, which contains an assessment of the economic situation, prospects economy and inflation.

Half an hour after that, the head of the Bank of England, Andrew Bailey, will make a speech. Investors want to hear from Bailey about his views on the BoE's plans for this year.

The soft tone of his statements and a softer decision of the BoE on the level of interest rates will cause a sharp weakening of the pound.

But the increase in the interest rate, as planned by 0.50%, is also unlikely to strongly and long-term support the pound.

Theoretically, an increase in the interest rate (under normal economic conditions) should positively affect the quotes of the national currency. However, it is difficult to name the current economic situation in the UK, and the world as a whole, given the accelerating inflation, high energy prices, and the tense geopolitical situation. And these problems are only getting worse.

And from the news for today, which will increase volatility in the market, including in the GBP/USD pair, you should pay attention to the publication at 14:00 (GMT) of the report of the Institute of Supply Management (ISM) USA with data on business activity in the service sector of the American economy, which accounts for almost 90% of US GDP and about 80% of the country's working citizens. A relative decline is also expected here. PMI forecast for July is 53.5 (versus previous values of 55.3 in June, 55.9 in May, 57.1 in April, 58.3 in March, 56.5 in February, 59.9 in January). Although the index is above the 50 mark, which separates the increase in activity from the slowdown, a relative decline in the indicator could negatively affect the USD. The lower the PMI forecast, the more the dollar will decline.

As of this writing, GBP/USD is trading near 1.2185, being in the zone between the strong levels of 1.2128 and 1.2205. A breakdown in one direction or another can determine the further direction of the GBP/USD dynamics.