The market expects the Bank of England to raise interest rates to stimulate the pound

The Bank of England rate hike pricing will still follow the Fed. The Bank of England will announce its interest rate decision on Thursday (19:00 on August 4), and a potential 50 basis point rate hike will largely depend on the global monetary tightening trend rather than its domestic factors. The Bank of England is tightening monetary policy like the Fed, but the UK's economic outlook is far worse than that of the US, making it difficult for the Bank of England to take a hawkish stance like the Fed. Former finance minister Sunak has a significant advantage among swing voters. Although he and his rival - Foreign Secretary Truss - are rather unpopular with the general public.

The dollar has been widely sold off in nearly two weeks since mid-July, benefiting many currencies, including the pound, but HSBC doubts the pound's rally against the dollar will survive Thursday's BoE rate decision and economic forecast update . Getting the Bank of England to raise rates by 50 basis points may also have some dovish elements. This could take the form of poor growth forecasts from the August inflation report, which could fuel market skepticism about the potential size and persistence of future rate hikes.

Affected by key U.S. inflation data (Personal Consumption Expenditure (PCE) price index rose 1.0% in June, the largest increase since September 2005, after rising 0.6% in May. The dollar rebounded after the data, but the pound rebounded later in the afternoon. Almost all losses were recovered, and it closed at 1.2163 at the same level as the previous day. Now the market is uncertain about the future interest rate hike expectations for the US dollar, and this week will also usher in the Bank of England's interest rate meeting. If the Bank of England continues to raise interest rates and The rate hike to 50 basis points is expected to give the pound a greater stimulus.

Analysts at TD Securities expect the Bank of England to raise interest rates by 50 basis points, but there may be 3-4 members inclined to raise interest rates by 25 basis points; the Bank of England should announce the preliminary details of the sale of British government bonds at the meeting, but no decision has been made . Some external factors, such as dollar movements and U.S. data, are more likely to affect the pound as markets are wary of further central bank monetary tightening. And given the structural challenges facing the euro area, the pound will continue to outperform the euro against the euro. In addition, the details of the sale of Treasuries will likely remain a key factor driving home prices.

UK July Manufacturing PMI: UK manufacturing began to fall back in the third quarter. Production contracted for the first time since May 2020, and new orders fell for the first time in two years. Rising market uncertainty, the cost of living crisis, the Russia-Ukraine conflict, ongoing supply problems and inflationary pressures have all hit demand for commodities at the same time, while post-Brexit legacies and an increasingly bleak global economic backdrop are holding back exports .

As the Federal Reserve continues to tighten policy, the U.S. economy could slip into a recession, with little room for stock markets to rise and earnings likely to come in weaker-than-expected. Strategists such as Michael Wilson say the bond market is assuming the Fed will get inflation under control, which is good for fixed income but bad for equities because of the "potentially heavier than normal" costs associated with it, such as a recession. “After the recent rally, the risk-reward is low, so trades may fade over time accordingly,” they said. “Watch out for recession warning signs, including the magnitude of EPS downgrades and PMIs below 50.”

The agency expects the US non-farm payrolls to grow weakly in July, but still reach a solid level of 250,000, the unemployment rate edged up to 3.7%, and average hourly earnings rose 4.9%. While agency surveys show hiring has remained robust this year, averaging close to half a million a month, household surveys show employment peaked in the first quarter and has been slowing since. The labor force participation rate also declined over the same period. Combined with the fact that more and more people have already found work, the job market is likely to remain tight for some time, and the cooling process of wage growth may take some time, possibly longer than the Fed expects.