Sterling Pares Gains After BOE Decision — Market Talk

1135 GMT - Sterling trims its gains after the Bank of England held interest rates at 3.75% as expected. The BOE voted 6-3 in favor of the decision with three policymakers preferring to raise rates by 25 basis points. However, BOE Governor Andrew Bailey said the process of underlying disinflation that was intact prior to the Middle East conflict remains in train. "That provides some tentative evidence that inherited inflation persistence may be weaker than had been presumed," he said. Sterling last trades at $1.3373, only marginally higher on the day, down from $1.3392 before the decision. The euro falls 0.1% to 0.8571 pounds, versus 0.8567 beforehand. ([email protected])1132 GMT - The Bank of England remains in wait-and-see mode given limited evidence of second-round inflation effects from the energy crisis, says George Brown at Schroders in a note. The BOE held interest rates at 3.75% on Thursday, as expected. "Despite the sharp rise in energy prices, the majority appear unconvinced this will translate into more persistent domestic inflation," he says. Wage pressures in the labor market appear weaker than expected in the face of the external energy shock, Brown notes. "That should limit the risk of second-round effects becoming embedded and, in our view, mean the bank can remain on hold for the foreseeable future," he says. ([email protected])1122 GMT - Yields on U.K. government bonds, or gilts, turn lower after the Bank of England kept interest rates unchanged at 3.75% at Thursday's rate decision, as widely expected. Three out of nine policymakers preferred to raise rates. However, the BOE's statement said there was little sign of second-round effects from high energy prices so far and pointed to slowing wage growth and a weak labor market. Ten-year gilt yields drop to 5.005%, down 1.3 basis points on the day, after the rate decision, from 5.027% beforehand, Tradeweb data show. ([email protected])1059 GMT - Bitcoin rises along with U.S. stock futures as traders weigh the Federal Reserve's latest policy decision and big tech earnings. The Fed left rates unchanged Wednesday while Chair Kevin Warsh declined to provide clear signals about future policy, weakening the dollar. "Perhaps this was due to investors entering the decision with a decent 35% probability of a rate hike at this meeting, or because market participants wanted clear signals about when policymakers are planning to press the hike button," XM analyst Charalampos Pissouros says in a note. Microsoft shares rose after it delivered stronger-than-expected revenue growth forecasts while Meta fell after its revenue guidance underwhelmed. Apple and Amazon earnings are due later. Bitcoin rises 1.7% to $64,421, LSEG data show.([email protected])1057 GMT - Eurozone growth figures for the second quarter are good news for the European Central Bank, which needn't be overly concerned about growth, Berenberg's Felix Schmidt says in a note. GDP increased by 0.4%, better than consensus and up from zero growth in the first three months of the year. PMI surveys point to a good start to the third quarter, even if much will depend on the Iran war and the development of energy prices, Schmidt says. Therefore, the focus is on inflation, which largely depends on any deal between the U.S. and Iran. "A ceasefire would allow the ECB to leave its key interest rate unchanged and enable the eurozone to achieve solid growth in 2026," he says. ([email protected])1036 GMT - The eurozone economy is motoring on despite continued disruption due to the war in the Middle East, ING's Bert Colijn says in a note. GDP grew 0.4% in the second quarter, above expectations. "Eurozone GDP growth could well continue to motor on at a decent-- though not spectacular--pace," Colijn says. Manufacturing is benefiting from a smaller energy shock than in Asia and steady public investment, while consumer spending is being supported by wage increases despite higher prices at the pump, he adds. Still, Colijn notes that headline data continues to be distorted by figures in Ireland, which are notoriously volatile. "Of course, the war in the Middle East poses the main downside risk to the eurozone economy for the moment," he says. ([email protected])1026 GMT - U.S. Treasury yields rise in European trade while the dollar edges lower after Federal Reserve Chairman Kevin Warsh's press conference left some uncertainty about the policy outlook. The 30-year yield extends its rise to hit a new 19-year high of 5.240%, according to Tradeweb. "Investors demanded greater compensation for longer-term inflation and policy uncertainty," The Revacy Fund's Zaheer Anwari says in a note. The Fed held rates but three members dissented and favored a hike. "The result was...a divided decision that revealed growing concern over persistent inflation," Anwari says. The DXY dollar index falls 0.1% to 100.820. ([email protected])1016 GMT - Despite a positive surprise for economic growth in the second quarter, the European Central Bank is unlikely to consider raising interest rates higher than 2.50%, from 2.25% currently, Alexander Krueger at ABN AMRO says in a note. "The economy is making up for what it lost in the first quarter. At that time, Ireland was holding the economy back; now it is helping to drive economic growth," he says. Given the added strain from the Iran war, 0.4% growth for the quarter is positive. Still, a prolonged Middle East conflict would delay a return to normalcy, the analyst says. The ECB will have to keep a close eye on economic developments as well as inflation, he says. ([email protected])1004 GMT - The German economy weathered the war-prompted energy-price shock remarkably well in the second quarter, says Philipp Scheuermeyer, economist at KfW Research. GDP rose 0.2%, with first-quarter GDP revised up to 0.4%. "We can now expect a number of upward revisions to economic forecasts," Scheuermeyer says. Data shows surprisingly strong exports, with manufacturing orders pointing upward again, and business sentiment improving significantly in July. Private consumption also remained stable, despite the loss in purchasing power. However, the crisis isn't yet over given that the Strait of Hormuz remains blocked, he says. The current heatwaves could also restrict industrial production somewhat this summer due to supply bottlenecks, he adds. ([email protected])1002 GMT - The cost of default protection for Middle East nations' sovereign debt climbs as U.S.-Iran hostilities intensify. The U.S. military launched strikes against Iran on Wednesday night after Iran attacked U.S. forces in Jordan. The renewed tensions raise concerns "that the conflict could widen again after several days of calm", Capital.com's Daniela Hathorn says in a note. Bahrain's five-year sovereign credit default swaps rise 4 basis points to 309bps, S&P Global Market Intelligence data show. Qatar's five-year sovereign CDS climbs 1bp to 38bps. ([email protected])0954 GMT - With the surprisingly strong 0.2% increase in second-quarter GDP and upward revisions of past quarters, Germany's economic recovery has been more pronounced than previously expected, Commerzbank's Joerg Kraemer says in a note. Germany's statistics agency upgraded first-quarter growth to 0.4% from 0.3%, while also raising 2024 output to zero growth from a 0.5% contraction previously reported. "All in all, this significantly improves the starting base for our 2026 growth forecast, which is why we are revising it upwards from 0.6% to 1.0%," Kraemer says. However, recent escalation of the Iran war is still likely to dampen any recovery in the second half of this year, though that has already been taken into account in Commerzbank's new forecast, he says. ([email protected])0950 GMT - Sterling would likely rise if the Bank of England's policy decision at 1100 GMT strengthens market pricing for an interest-rate rise in September, MUFG Bank's Derek Halpenny says in a note. The BOE could convey increased concerns over the implications of the Middle East conflict, he says. A conflict that drags on appears a greater risk today than at the June meeting, he says. A more prolonged energy price rise could "certainly force the BOE to act even in circumstances of mixed labor market conditions." The market prices a 50% chance of a rate rise in September, LSEG data show. Sterling falls 0.1% to $1.3357. The euro falls 0.1% to 0.8571 pounds. ([email protected])