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by Charalambos Pissouros

BoE Decides on Monetary Policy, BoJ Stays on Hold

The pound continued to suffer, underperforming once again all its major peers. Although the main driver for the currency is likely to continue being political developments, GBP traders may turn attention to the BoE decision today. We don’t expect any policy change, so attention is likely to fall to the accompanying statement and the voting. Overnight, the BoJ stood pat, but downgraded its view on factory output, while the Aussie gained on Australia’s better-than-expected jobs report.

Pound Continues to Tumble Ahead of BoE Decision

The pound continued drifting south against the other G10 currencies on Wednesday and during the Asian morning Thursday. It lost the most ground against AUD, NZD, NOK and CAD, while it underperformed the least versus JPY, EUR and SEK.

GBP performance G10 currencies

The British currency continued bleeding following UK PM Johnson’s decision to rule out any extension to the December 2020 deadline for negotiations over trade with the EU, something that revived fears over a hard Brexit. That said, although the main driver for the currency is likely to continue being political developments, today, GBP-traders may turn attention to the BoE policy decision.

At its previous meeting, the Bank kept interest rates unchanged, but two members voted in favor of a rate cut. In the statement accompanying the decision, officials noted that if global growth fails to stabilize or if Brexit uncertainties remain entrenched, monetary policy may need to reinforce the expected recovery in UK GDP growth and inflation. They also added that provided these risks do not materialize and the economy recovers broadly in line with the MPC’s latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target.

Since then, GDP data showed that the economy stagnated in Q3 after growing 0.2% qoq in Q2, while retail sales for October contracted. Yesterday, inflation data for November showed that the headline CPI rate stayed unchanged at +1.5% yoy, instead of ticking down to +1.4% as the forecast suggested, while the core rate remained unchanged at +1.7% yoy as was anticipated. Although the set was somewhat better than expected, both rates remained below the Bank’s objective of 2%. On the Brexit front, the election outcome was seen ass easing the uncertainty, but Johnson’s stance over the transition period brought that element back on the table. Therefore, the political uncertainty and the softness in latest UK data keep the door to a rate cut still open in our view. Indeed, according to the UK OIS (Overnight Index Swaps), there is a 56% chance for interest rates to be lower by December 2020.

UK CPIs inflation

However, given that this will be one of the smaller meetings that are not accompanied by updated economic projections and a press conference by the Governor, we don’t expect any major changes in policy or the Bank’s language this time around. Officials may prefer to wait for more data releases and political developments before they decide which policy path they will take. It would be interesting though to see whether we will have members voting in favor of a cut again, and if so, how many. If any other member joins Michael Saunders and Jonathan Haskel in voting for a rate reduction, the pound is likely to extend its latest slide. On the other hand, if one or both of the prior dissenters withdraw their vote, the British currency may correct higher.

GBP/CHF – Technical Outlook

As all the pound pairs, GBP/CHF had been in a tumbling mode as well this week. That said, the slide was stopped near the 1.2810 zone, which acted as a decent support barrier on November 26th and 27th, as well as on December 2nd, 3rd and 4th. On Tuesday, the rate fell below the tentative upside support line drawn from the low of August 13th, and thus, we would consider the outlook to have turned somewhat negative.

That said, in order to start examining the case of larger declines, we would like to see a break below 1.2770, marked by the lows of November 20th and 22nd. Such a dip may initially target the 1.2685 zone, which provided support from October 18th until November 14th. If the bears do not stop there either, then a break lower may extend the decline toward the 1.2620 zone, marked by the lows of October 16th and 17th.

Looking at our short-term oscillators, we see that the RSI stands flat near its 30 line, while the MACD, although below both its zero and trigger lines, shows signs of bottoming. Both indicators detect negative momentum, but the bottoming signs suggest that a small corrective bounce may be looming before the next negative leg.

On the upside, we would like to see a recovery back above 1.3000 before we start examining whether the prior uptrend has resumed. Such a move would also place the rate back above the aforementioned upside line and may initially aim for the 1.3075 barrier. Another break, above 1.3075, could carry more bullish implications, perhaps paving the way towards the 1.3200 zone, near the high of December 16th.

GBP/CHF 4-hour chart technical analysis

BoJ Stands Pat, Aussie Rallies on Employment Data

Flying from the UK to Japan, overnight we had a BoJ decision. The Bank kept its ultra-loose policy and guidance unchanged, reiterating that they expect “short- and long-term interest rates to remain at their present or lower levels as long as it is necessary to pay close attention to the possibility that the momentum toward achieving the price stability target will be lost.” The Bank also maintained its view that the economy continues to expand moderately, but downgraded its assessment on factory output, noting that “industrial production is falling due mainly to natural disasters.” As for our view, it remains the same as ahead of the meeting. Even though the Bank keeps signaling its readiness to cut rates further if needed, with little space to do so, officials may prefer to wait for a while and perhaps rely on their signals to do the work for now.

Moving to Australia, the Aussie was the main gainer, coming under buying interest on the back of the better-than-expected employment data for November. The unemployment rate ticked down to 5.2% from 5.3%, instead of holding steady as it was expected, while the net change in employment showed that the economy gained more jobs than forecasted. Specifically, it gained 39.9k jobs, while the forecast was 14.0k.

The message we got from the latest RBA meeting was that officials are comfortable staying on the sidelines, but the minutes showed that they agreed it is important to reassess the economic outlook at the February meeting. This prompted market participants to bring forth the timing of when they expect the Bank to cut again, assigning nearly a 90% chance for that to happen in April. However, the upbeat employment report encouraged them to push that timing slightly back again, with a quarter-point decrease now expected in May.

ASX 30-day interbank cash rate futures yield curve

In the US, the House of Representatives voted to impeach President Trump. However, the market did not react on the outcome as a Senate trial is still pending, where Republicans, who have the majority there, are most likely to support him.

AUD/JPY – Technical Outlook

AUD/JPY has been in a recovery mode since yesterday, boosted even more after today’s employment report. On the daily chart, the price structure still suggests a medium-term uptrend, in play since August 25th, but before we start examining higher areas, we would like to see a break above 75.60, which is slightly below the peak of December 16th.

If the bulls are strong enough to reach and breach that hurdle, we may see upside extensions towards the 75.95 zone, marked by the highs of December 12th and 13th. Another break, above 75.95, would confirm a forthcoming higher high on the daily chart and may set the stage towards the high of July 1st, at around 76.30.

Shifting attention to our short-term momentum studies, we see that the RSI lies above 50 and points up, while the MACD has bottomed slightly above zero and just poked its nose above its trigger line. Both indicators suggest that the rate has started gaining upside speed and support our view for some further near-term advances.

Alternatively, we would like to see a dip below 74.85 before we start examining the bearish case. Such a dip would confirm a forthcoming lower low and may initially aim for the inside swing high of December 5th, at around 74.63. If that level is also broken, then the bears may accelerate and push towards the inside swing highs of December 9th and 10th, at around 74.25, the break of which may pave the way towards the 73.95 zone.

AUD/JPY 4-hour chart technical analysis

As for the Rest of Today’s Events

Apart from the BoE, we also have two more central banks deciding on interest rates: The Riksbank and the Norges Bank. Getting the ball rolling with the Riksbank, at its previous meeting, the world’s oldest central bank kept its repo rate unchanged at -0.25%, but changed its forward guidance saying that the rate will most probably be raised to zero in December. Latest inflation data showed that the CPI and CPIF rates rose to +1.8% yoy and 1.7% yoy, from +1.6% and +1.5% respectively, while the core CPIF metric, which excludes energy, has ticked up to +1.8% yoy from +1.7%. Although GDP data still pointed to subdued economic growth in Q3, the qoq rate saw improvement from Q2, to +0.3% from +0.2%. So, having all these in mind, we expect Swedish policymakers to not hesitate, and push the hike button at this meeting. The big question in our view is whether they will signal more hikes in the months to come, or whether they will step to the sidelines for now and wait to see how economic developments will unfold.

Sweden CPIs inflation

Moving on to the Norges Bank, its last meeting was proven a non-event as the Bank kept its policy rate unchanged at +1.50% and noted that new information indicated that the policy rate outlook was little changed since September. It also reiterated the guidance that the rate will most likely remain at the present level in the coming period. Latest inflation data showed that both the headline and core CPI rates slid to +1.6% yoy and 2.0% yoy, from +1.8% and 2.2% respectively, while GDP data showed that the economy stagnated in Q3, after growing 0.2% qoq in Q2. All these confirm that the Bank’s latest normalization phase is over and thus, we expect officials to reiterate that rates are likely to stay stable in the coming period.

Norway CPIs inflation

As for the data, we get the UK retail sales for November. Both headline and core sales are expected to have rebounded +0.3% mom, after sliding -0.1% and -0.3% respectively in October. The US initial jobless claims, the Philly Fed manufacturing index for December and the existing home sales for November are also due to be released.

As for tonight, during the Asian morning, Japan’s National CPIs for November are coming out. No forecast is available for the headline rate, while the core rate is expected to have ticked up to +0.5% yoy from +0.4%.


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