British statistics for the past week can only be characterized as a failure. The growth rate of industrial production slowed from 2.9% to 1.8%. Inflation did not begin to grow as expected but remained unchanged, and worst of all, it is the growth rate of wages that slowed. And both in terms of premiums, and without them. Of course, the reduction in the number of applications for unemployment benefits by 7.7 thousand, as well as the acceleration of growth in retail sales from 1.4% to 3.9%, somewhat brightened the bad news. And they indicate that the pound could not get cheaper as much as it happened. Although the US statistics turned out to be quite good. The main thing is that inflation has grown from 2.5% to 2.8%, and given the accelerated growth in retail sales from 4.8% to 5.9%, this is generally excellent. But industrial production was somewhat disappointing since its growth rate slowed from 3.6% to 3.5%. But this was offset by the growth in producer prices, accelerating from 2.6% to 3.1%. Well, the cherry on the cake was an increase in the refinancing rate of the Fed from 1.75% to 2.00%. Nevertheless, all this does not explain why the dollar so appreciated in relation to the pound.
The fact is that the results of the meeting of the Federal Commission for open market operations were absolutely predictable and fully coincided with market expectations. The Fed once again raised the refinancing rate, confirmed plans for another increase in the refinancing rate before the end of the year, as well as the intention to further tighten monetary policy. All this has long been taken into account by the market, so there were no surprises here.
But there is such a thing as the index of the dollar, and if some currency that enters into it falls dramatically, then it draws other currencies for itself. This is particularly true of the single European currency, which accounts for almost half of the entire dollar index. It is the powerful reduction of the single European currency that provoked such a significant drop in the pound. The thing is in the outcome of the meeting of the ECB's Monetary Policy Board. Of course, a couple of months ago, rumors that the ECB could extend the program of quantitative easing provoked a prolonged and continuing strengthening of the dollar to this day. However, shortly before the last ECB board meeting, preliminary data on inflation showed significant acceleration, and many were confident that in such circumstances the ECB would not change anything and would continue to adhere to its plan, according to which the quantitative easing program was to be rolled off in September current year. Nevertheless, apparently, the ECB did not dare to rely on inflation data, as there is a risk of its next slowdown, and in fact, extended the program of quantitative easing. As planned earlier, until September the program will operate in the amount of 30 billion euros per month, but from October it will not be completed but will be reduced to 15 billion euros per month. Now it is planned to roll it only in December. But do not forget that this is not the first extension of the quantitative easing program so that Mario Draghi can extend it even after December. Also, the head of the ECB said that the issue of raising the refinancing rate will not be considered until next summer. And this is another postponement of this issue, so that in the future, further postponing of the future is possible.
Now it is the Bank of England's turn to disclose its decisions and plans for monetary policy. Now there is no doubt that the Bank of England will leave everything unchanged, not only because of the stoppage of inflation but also because the British economy is very closely intertwined with the economy of the European Union. And while the ECB continues to pursue a super-soft monetary policy, the Bank of England will not dare to take new steps to tighten it, as this will inevitably lead to negative consequences for the UK economy. Although this is a rational step in the current economic realities, investors will perceive this as weakness and indecision, since inflation is clearly high for the current refinancing rate of the Bank of England.
If in the UK there will be only a meeting of the Board of the Bank of England, then in the US there is a lot of interesting macroeconomic data, so that they will have some influence on the state of affairs in the market. In particular, the number of issued construction permits should be reduced from 1,352 thousand to 1,350 thousand, but the number of construction projects should increase from 1,287 thousand to 1,317 thousand. In addition, home sales in the secondary market may increase from 5.46 million to 5.52 million. However, despite quite good data, already from the second half of the week the dollar will be under the strongest pressure. This will be due to the projected increase in the number of primary and repeated applications for unemployment benefits from 218 thousand to 221 thousand and 1,6970 thousand to 1,729 thousand, respectively. In general, the number of applications for unemployment benefits can increase by 35 thousand and at the very end of the week there will be preliminary data on business activity indices, and the service index may fall from 56.8 to 54.9, and the production index from 56.4 to 55.2. So it is not surprising that the composite index of business activity is expected to decrease from 56.6 to 55.1. Naturally, such a serious decline in the index of business activity will have a negative impact on the dollar.
Thus, although the results of the meeting of the Bank of England can only be regarded as negative, given their predictability, they will not have such a strong impact on the market. Although for a short time the pound will be under strong pressure. So by the end of the week, given the clearly negative forecasts for US statistics on Thursday and Friday, the pound may rise to 1.3350.