Sterling rose back up above the 1.31 level versus the US dollar this morning ahead of tomorrow’s ‘Super Thursday’ announcement from the Bank of England.

We don’t expect any immediate change in policy from the BoE this week. Interest rates are almost certain to be held at record lows, with the bank’s quantitative easing programme also highly likely to be maintained at its existing £745 billion capacity. With no change in policy expected, investors will instead be keeping a close eye on comments in the bank’s accompanying communications on the state of the UK recovery and potential future policy moves, notably in the bank’s quarterly Monetary Policy Report.

Chief economist Andy Haldane, the only member on the MPC to not vote for an increase in the QE programme in June, stated last month that the UK economy was enjoying a ‘V-shaped’ recovery. Given recent data strength, notably the June retail sales figures, it will be interesting to see whether any other members of the committee are coming around to this view. This week’s Monetary Policy Report will also contain updated projections for both growth and inflation. While the latter will be largely irrelevant, more upbeat-than-expected GDP forecasts would likely provide some support for sterling this week.

Investors will also be keeping a close eye on comments on the possibility of negative interest rates. While we don’t think that the bank will definitively rule out the possibility of negative interest rates this week, we also don’t think that they will indicate it is on the immediate horizon either. An opening of the door to a negative interest rate policy (NIRP) on Thursday would be a big surprise to the market and could lead to a sharp sell-off in the pound. Should the bank again indicate that NIRP is under consideration, then we don’t think we’ll see too much of a reaction in financial markets.

US dollar sell-off resumes as Congress talks continue

The dollar resumed its slide against its major peers yesterday afternoon, dragged lower by falling US yields and an inability of Congress to come to an agreement on extending its additional unemployment insurance benefits. The lack of agreement between the Republicans and Democrats is now becoming a very significant cause for concern for investors. Without the additional income support, millions of Americans are currently in precarious financial positions after the covid-induced lockdowns led to mass layoffs on a scale not witnessed in recent memory. The government has set an end of the week deadline to come to an agreement, with Treasury Secretary Steven Mnuchin claiming yesterday that progress was being made.

Politicians are, however, running out of time to get funds to those that need it, particularly amid reports that more than 40% of US renters could be facing eviction. This does, of course, come at a delicate time for the US, which has seen the mass reimposition of shutdown measures in a number of states in order to combat the rising virus numbers. Consumer confidence is likely to be low and while this nervousness over the outlook has not yet been reflected in US economic data, we think that it would only be a matter of time before it is should the uncertainty over the lack of government support drag on much longer.

Even without the lingering political uncertainty mentioned above, the dollar could be in for another volatile few days of trading, with a number of tier-1 economic data releases on tap. This afternoon’s non-manufacturing PMI from ISM should receive a fair amount of attention, as will Friday’s nonfarm payrolls report for July. As we mentioned on this week’s episode of Ebury’s podcast, FX Talk, we think that this week’s report could be set to surprise to the downside, given the recent increase in virus cases and rise in weekly jobless claims. A disappointing reading here would be a big warning sign and could trigger another bout of weakness in the greenback toward the end of the week.