Pound Traders Lock Their Gaze on the BoE
The pound traded higher against most of the other G10 currencies on Wednesday, after PM May won a vote over the Brexit bill in the House of Commons and Lords approved the government’s plan without a vote. The pound lost ground only against SEK, while it ended the day virtually unchanged against USD and NOK. The main losers were NZD, JPY and AUD in that order.
As for today, pound traders are likely to turn their gaze back to monetary policy and the BoE gathering. Expectations are for the Bank to keep interest rates unchanged via a 7-2 vote, with the ultra-hawks Ian McCafferty and Michael Saunders being the most likely candidates for dissenting once again. This is one of the smaller meetings, which is not accompanied by a press conference and updated economic projections and thus, if indeed the Bank decides to keep rates untouched, investors will quickly turn their gaze to the votes, the accompanying statement and the meeting minutes.
Since the latest meeting, data showed that both the headline and core inflation rates declined further in April, to +2.4% yoy and +2.1% yoy respectively, and stabilized there in May. What’s more, average hourly earnings including bonuses slowed to +2.6% yoy in March and further to +2.5% in April. The excluding bonuses rate ticked up in March, to +2.9% yoy, but ticked back down to +2.8% in April.
Although the May PMIs and retail sales data for both April and May suggest that the economy may have started to turn the corner following the slowdown observed since the turn of the year, with inflation slowing further and wages not showing signs of picking up, it is very unlikely that the Bank will consider hiking at this meeting. Investors may be on the lookout for any hints as to whether policymakers are willing to push the hiking button in the coming months, perhaps as early as August.
In our view, policymakers are likely to acknowledge the signs pointing to some stabilization in the economy, and also reiterate that the Q1 slowdown was likely temporary. However, we expect them to stress the need for more evidence before they decide to push the hiking button. We believe that they may keep the door open for a hike in the months to come, but not overcommitting to an August one.
That said, a couple of weeks ago, BoE Deputy Governor Dave Ramsden said that “the data we have had so far suggests our interpretation of the slowdown in Q1 as temporary looks to be being borne out.” He also said that the period of usually weak growth in wages appeared to be coming to an end. Ramsden is considered one of the most dovish rate-setters among the MPC. He was one of the two members who voted against the November hike. Thus, his optimistic remarks tilt the risks slightly to the hawkish side and increase somewhat the chance for another member joining those voting for a hike even at this meeting.
As for the pound, in case the decision is accompanied with a hawkish flavor or a 6-3 vote, it could strengthen as investors will get more confident on the prospect of an August rate hike. On the other hand, a 7-2 vote accompanied with signs that policymakers are not in a rush are likely to weigh on August-hike expectations and thereby bring the pound under selling interest again.
Having said all these, pound traders should stay on guard in the aftermath of the decision as later in the day, BoE Governor Carney delivers his annual Mansion House speech, where he could elaborate further on the economic outlook.
EUR/GBP – Technical Outlook
EUR/GBP has been trading within a range, between 0.8840 and 0.8680, for quite a while now. We still wait with anticipation the break through one of the sides. Looking at a bigger picture, the pair is still within a falling channel, taken from the end of September last year. On a shorter times scale, we can see EUR/GBP is trying climb higher with the help of the tentative short-term upside support line, drawn from the last Friday’s lows.
Thus, although we are neutral on the near term, we see the case for the pair to continue climbing higher within the aforementioned range. A break of the 0.8800 level could interest some more bulls to join in and drive EUR/GBP towards the next good area of resistance at around 0.8820. Certainly, above that lies the 0.8840 zone, which is the upper side of the range, a break of which, could open the doors towards the upper bound of the previously mentioned channel.
Alternatively, if we see a break below the tentative support line, then the next area of support for us to monitor, could be the 0.8768 level, a break of which could send EUR/GBP to test the 0.8752 level, marked by the low of the 19th of June. If this level is not able to withhold the rate, then the pair could make its way towards the short-term upwards moving trendline, drawn from the 30th of May. If that line is broken, then we could see a continuation fall towards the lower side of the previously mentioned range.
The RSI is currently running flat, but above its 50 mark, which is still a slightly bullish indication. The MACD is also running flat and is above its zero line. The only issue here is that the indicator has moved slightly below its trigger line, which tells us to remain cautious.
SNB and Norges Bank Decide on Policy as Well
Besides the Bank of England, we have two more central banks deciding on monetary policy today: the SNB and the Norges Bank.
Getting the ball rolling with the Swiss National Bank, at its latest meeting, this Bank decided to keep interest rates on hold, and revised down its inflation forecasts. According to these projections, the Bank expects inflation to be a tick below 2% even in 2020. Most importantly, the forecasts are based on the assumption that interest rates will remain at current levels for the entire forecast horizon. Latest CPI data showed that Swiss inflation accelerated to +1.0% yoy in May from +0.8% yoy in April, but this is still well below the SNB’s inflation goal. This, combined with the latest strength of the Swiss Franc, especially against the euro, due to the recent global uncertainties, supports the case for the SNB to keep its interest rates and policy stance unchanged.
Moving to Norway, the Norges Bank is expected to remain on hold as well. At its latest policy meeting, Norwegian policymakers maintained the view that interest rates are likely to be raised after summer 2018. Back then, the headline and core CPI rates were at +2.2% yoy and +1.2% yoy respectively, while now they stand at similar levels, +2.3% and +1.2%. Thus, we doubt that officials will alter their view at this gathering.
EUR/NOK – Technical Outlook
The Norwegian Krone has been strengthening against its European counterpart since around the 2nd of May, when we saw a trend reversal to the downside. In the short run, the pair came under selling interest after it hit resistance at the downtrend line taken from the peak of the 2nd of May, but the slide was halted by the 9.443 support level.
For now, until the downtrend line is broken, we will remain bearish and aim for the recent lows again. A break below the 9.443 level could open the path towards the 9.397 area, marked by the lows of last week. Slightly below that lies the return line of the latest downtrend that could act as a strong area of support. Certainly, we could see a scenario, where EUR/NOK moves again towards the downtrend line and then retraces back down towards the previously mentioned levels.
Alternatively, a break above the downtrend line could interest more bulls in stepping in taking the driver’s seat. A good strong break through the 9.514 zone could open the doors towards the 9.514 or 9.540 levels. If the last level is not able to withhold the rate from rising, then we could potentially start aiming for the 9.608 mark, which was the 29th of May high.
As for the Rest of Today’s Events
From the US, we get the Philly Fed manufacturing index for June and expectations are for a decline to 28.9 from 34.4. Initial jobless claims for the week ended on the 15th of June are forecast to have risen somewhat, to 220k from 218k the previous week. However, this will drive the 4-week moving average down to 221.57 from 224.25.
Canada’s wholesale sales for April are also coming out. The forecast suggests a slowdown to +0.4% mom from +1.1% mom in March.
Tonight, during the Asian morning Friday, we have Japan’s National CPIs for May. No forecast is currently available for the headline rate, while the core one is anticipated to have stayed unchanged at +0.7% yoy. Both the headline and core Tokyo CPIs for the month continued to slow, to +0.4% yoy and +0.5% yoy from +0.5% and +0.6% respectively, which suggests that both the National rates may follow suit.
Last Friday, the BoJ kept policy unchanged, but downgraded its language on inflation. The overall message we got from the meeting was once again that the Bank remains far away from starting to think about a stimulus exit and another slowdown in the National CPIs is likely to confirm just that.
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