BoE Raises Repo Allocation to Record High Amid Economic Growth Investment Needs

The Bank of England increased its short-term repo allocation to a record £40.29 billion from £36.584 billion the previous week. Repos allow banks to exchange government bonds for central bank cash, maintaining market interest rates near the BoE's policy rate.

A report indicated the UK needs an additional £1 trillion investment over the next decade to achieve economic growth targets. The new government aims for a 2.5% annual growth rate, requiring £100 billion more investment per year, particularly in energy, housing, and venture capital. UK's pension sector could contribute significantly by reallocating its long-term capital, with potential government incentives to boost domestic investment. A review of the pension system has been called to encourage more investment in UK startups.

British businesses plan to raise prices by the smallest margin in nearly three years, but wage growth remains steady, according to the BoE's Decision Maker Panel survey. Expected selling price increases were at 3.6%, the lowest since 2021, while wage growth forecasts stayed at 4.1%, indicating no easing of wage pressures.

Concerns over high wage growth persist among MPC members who fear it could prolong inflation. Company uncertainty decreased following Prime Minister Keir Starmer's election victory. Investors see a 25% chance of a BoE rate cut in September, with a November cut fully anticipated.

British retailers reported a third consecutive month of declining sales in August, expecting another dip in September. Retailers are cautious with investment and hiring plans due to weak demand and recent poor weather, with investment intentions dropping and hiring plans reducing further. Separate data showed a decrease in shop prices in August for the first time since 2021.

A Reuters poll forecasted solid growth in British home prices over the next two years, outpacing inflation, though first-time buyer affordability may improve due to lower borrowing costs. A lack of available properties could support prices, and the government plans to expedite home-building by reducing planning delays. House prices are predicted to rise 2.5% in 2024, 3.0% in 2025, and 4.0% in 2026. Rents are expected to rise faster than inflation, making it harder to save for a mortgage.

Growth in the UK's construction sector slowed in August despite an increase in homebuilding. The S&P Global UK Construction PMI fell to 53.6, below expectations, due to a sharp slowdown in civil engineering. The construction industry remains stronger than earlier in 2024, aided by a recent BoE rate cut and government plans for new homes. Input costs rose at a slower pace, reflecting easing inflation pressures across manufacturing, services, and construction sectors.

The U.S. dollar remained near a one-week low against major currencies on Friday as mixed job market signals ahead of the monthly payrolls report could influence Federal Reserve policy on rate cuts. Despite stabilizing after a sharp drop in August, Bank of America Securities remains bearish on the dollar, citing historical trends of continued declines following similar breakouts. The bank noted that the Dollar Index could fall further, particularly against EUR, GBP, and AUD. Even though the DXY hit a low for the year in August, broader indices suggest the dollar is still overvalued. Additionally, the U.S. 10-year Treasury yield often declines after the Fed's initial rate cuts, which could further loosen global financial conditions.

While some analysts, such as those at JPMorgan, acknowledge growing diversification away from the dollar, they argue that its dominance is still supported by structural factors like deep capital markets and liquidity. Although geopolitical factors and shifts in global trade and finance are driving some diversification, the fundamental confidence in the dollar remains strong.

Recent U.S. job data showed mixed results, with a decline in jobless claims suggesting a stable labor market, despite private payrolls rising by just 99,000 in August—the smallest increase since January 2021. Despite this, nonfarm payrolls are forecasted to rise by 160,000 in August after a 114,000 increase in July, with unemployment expected to decrease slightly to 4.2%.

The U.S. services sector remained stable in August with the ISM nonmanufacturing PMI slightly above 50, indicating continued growth, though at a slower pace. The report showed steady new orders but a slowdown in services employment, reflecting an easing but not deteriorating labor market. Expectations are that overall job growth may have improved in August. As a result, the GBP/USD pair is likely to fluctuate within its current or higher range during this period.

Data for Technical Analysis (1H) CFD GBP/USD

Resistance : 1.3179, 1.3180, 1.3183

Support : 1.3175, 1.3174, 1.3171  

1H Outlook  

Source: TradingView

Buy/Long 1 If the support at the price range 1.3170 - 1.3175 is touched, but the support at 1.3175   cannot be broken, the TP may be set around 1.3180 and the SL around 1.3168, or up to the risk appetite.

Buy/Long 2 If the resistance can be broken at the price range of 1.3179 - 1.3184, TP may be set around 1.3189 and SL around 1.3173, or up to the risk appetite.       

Sell/Short 1 If the resistance at the price range 1.3179 - 1.3184 is touched, but the resistance  1.3179 cannot be broken, the TP may be set around 1.3174 and the SL around 1.3186, or up to the risk appetite.

Sell/Short 2 If the support can be broken at the price range of 1.3170 - 1.3175, TP may be set around 1.3165 and SL around 1.3181, or up to the risk appetite.       

Pivot Points Sep 6, 2024 03:32AM GMT

Sources: Investing 1, Investing 2