Dollar Hands Back Some Gains; Pound Edges Higher Ahead of BOE Meeting

By Peter Nurse

Investing.com - The U.S. dollar handed back some of its earlier gains in European trade Thursday, while the pound was flat ahead of the latest Bank of England rate decision.

At 2:55 AM ET (0655 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% lower at 106.267, but is still up around 0.5% this week, reversing the trend of the previous two weeks.

Helping the dollar this week has been a reassessment of the likelihood of the Federal Reserve to maintain its aggressive monetary tightening stance in the wake of reasonable economic data and hawkish comments from a number of policymakers.

Data released Wednesday showed the U.S. services industry unexpectedly picked up in July amid strong order growth, supporting the view that the economy was not in recession despite output slumping in the first half of the year.

Additionally, a number of Fed policymakers, including San Francisco Fed President Mary Daly and Minneapolis Fed President Neel Kashkari on Wednesday, have been keen this week to emphasize that the fight to rein in soaring inflation was set to continue, even if the associated rate hikes could significantly curb economic activity.

Elsewhere, GBP/USD was 0.1% higher at 1.2153 ahead of the latest policy-setting meeting of the Bank of England.

The U.K. central bank is expected to raise interest rates by 50 basis points, the most since 1995, to 1.75%, its highest level since late 2008 at the start of the global financial crisis.

The BOE has already raised borrowing costs by 25 basis points five times since December, but the country’s main inflation rate has soared to 9.4%, a 40-year high. It said in June it would act forcefully if inflation pressures became more persistent.

“There's a chance we simply get another 25bp move, given there's not much in the recent economic data flow to suggest the BoE needs to move more aggressively than it did in June,” said analysts at ING, in a note.

“But concerns among hawkish committee members about job market tightness and a weaker pound point to a larger move this week - especially given that this is what markets are pricing.”

USD/JPY rose 0.3% to 134.29, EUR/USD gained 0.2% to 1.0184, helped by German factory orders performing better than expected in June, dropping by just 0.4% instead of the 0.8% predicted, in a month overshadowed by a growing energy crisis.

AUD/USD rose 0.4% to 0.6967, trying to regain the symbolic 0.70 level after seemingly dovish remarks from the central bank earlier in the week, while USD/CNY dropped 0.1% to 6.7521.