Oil rally maybe running out of steam

The British pound maintains its defenses anticipating positive rhetoric of Mark Carney at a meeting of the Bank of England on August 3. Fears of unrestrained growth in inflation due to the devaluation of the pound were refuted after data on consumer prices for June showed the first slowdown in a few months. Inflation is above the target level of 2%, significantly outpacing growth in wages, but CB officials are hoping that a weak pound could spur export enough to offset the decline in household spending. The reason of concerns may be sharp drop in consumer sentiment, which, along with a drop in purchasing power, may pose a threat to economic growth. The last two months, the consumer sentiment index from GfK has been very disappointing, dropping to -12 in June, indicating that the propensity for savings will grow, what probably caused inflation to subside. We believe that the Bank of England is likely to maintain low borrowing costs at the meeting in early August to boost credit expansion in the economy, despite the fact that earlier some British Central Bank officials advocated the rate hike propelling pound growth. Pessimism associated with the loss of access to a single European market is likely to be offset by gaining new major trading partners, particularly the US, what was recently mentioned by Trump in an interview with WSJ.

Extension of the easing conditions by the Bank of England is probably already priced in sterling and will not cause substantial shift of trading sentiments, however, it will be useful to learn BoE stance for the future policy. In the light of recent speeches by M. Draghi and D. Jellen in which they tried to be as vague as possible in the hope of gaining time, BoE Chairman Mark Carney, the traditional representative of “doves" probably recognizes the need to maintain low rates to support the economy. The tone of press-conference will probably also be shifted towards dovish remarks, allowing bears to test the level of 1.30 on GBPUSD, and maybe even more tickle the nerves of the bulls.

Dollar pullback has been temporarily put on hold, the downward pressure on the currency is growing again, as the Fed meeting did not slip by a single bullish remark, all that was said about the balance of assets was already played out. Data on orders for durable goods turned the game to positive note, signaling a stable consumer optimism, which gave the currency an impulse for a rally to 94.00. Today, the dollar index lost about 0.20% after the fight for the level of 93.50, while futures for the euro added 0.26% trading at the level of 93.55. Next week, the markets will be busy positioning ahead of the NFP report, where salary growth will be the guide for next dollar move. Labor market is at peak, and the willingness of businesses to pay more may be the key for expecting increased output.

Positive news helped Brent benchmark to set new gains above $50 after the meeting of OPEC and the promise of the Saudis to cut exports by 1M barrels in August. Market were also supported by the cuts of US crude inventories by 7M barrels last week. The expansion of US production continues to cause concern and a strong market reaction is possible on the API and EIA reports next Tuesday and Wednesday, as they will show how the American producers reacted to Saudi Arabia's retreat. The market risks going back into selloff if it becomes clear that the reduction in OPEC exports will be replaced by US barrels. Therefore, it may be premature to bet on growth.