Yesterday, the pound jumped after the UK CPIs unexpectedly accelerated, but came under selling interest a couple of hours thereafter following reports that UK PM May rejected Barnier’s updated proposal on the Irish border. As for today, the SNB and the Norges Bank decide on interest rates.
The pound traded lower or unchanged against all but one of the other G10 currencies on Wednesday. It gained only against CHF, while it underperformed the most against NZD, SEK and CAD in that order. The British currency traded virtually unchanged against USD, EUR and NOK. The Kiwi was the biggest gainer as it jumped on New Zealand’s better than expected GDP data for Q2.
Sterling had a rollercoaster ride yesterday. During the European morning, the currency gained after data showed that UK inflation unexpectedly accelerated in August, in both headline and core terms. The headline CPI rate rose to +2.7% yoy from +2.5%, while the core rate increased to +2.1% yoy from +1.9%. The forecasts were for both rates to have ticked down.
That said, the boost in inflation was mainly driven by summer-related factors, like theater tickets, and thus this may have a one-off effect. Judging by the jump in the pound at the time of the release, we believe that some investors may have brought somewhat forth their expectations with regards to the next BOE rate hike, but we don’t see this data set as a major game changer for the Bank’s thinking.
In any case, the bull’s joy did not last for long. A couple of hours later, sterling tumbled following a report saying that UK PM Theresa May rejected Barrnier’s improved proposal on the Irish border issue. The currency managed to recover a decent portion of those loses later in the day but took another hit after the European Commission President Jean-Claude Juncker said that a Brexit deal is still “far away”. His comments were followed by remarks from Ireland’s PM Leo Varadkar, who said that the two sides are not closer to finding common ground than they were six months ago.
Today, the informal EU summit continues and more headlines or comments adding to the idea that the EU and the UK have a long way to go before reaching an accord may prompt more GBP-traders to liquidate long positions and thereby, the pound could come under additional pressure. On the other hand, hints that the two sides could still finalize a deal at the October summit could wake up some GBP-bulls, and we may see Cable trading above 1.3200 again.
Besides the EU summit, pound traders may also keep an eye on the economic calendar and the UK retail sales for August. Expectations are for headline sales to have declined 0.2% mom after rising 0.7% in July. This is likely to drag the yoy rate down to +2.3% from +3.5%. Core sales are also expected to have slid 0.2% mom, following a 0.9% rise, which could push the core yearly rate down to +2.4% from +3.7%. The case for a decline in the yearly rates is supported by the BRC retail sales monitor for the month, which also showed that retail sales slowed during the month on a yoy basis.
After having several days of good moves to the upside, it seems that now, GBP/USD might be running out of steam. From the short-term perspective, the pair has broken a tentative upside support line yesterday, taken from the low of the 5th of September. This could be a signal for a potential correction in the short-run. For now, we will take a somewhat bearish stance, at least for a while.
A break below the 1.3125 area, could invite more bears to the table and we could see GBP/USD dropping towards the 1.3055 level, marked by the low of the 14th of September. If that level is not able to withhold the rate from falling further, then the pair could travel slightly lower, to test the 1.3025 hurdle, which held the pair from breaking lower on the 13th of September. Of course, if the bears still remain in control, GBP/USD could easily continue its path to the downside, where it could pass the psychological 1.3000 barrier and hit the 1.2980 support, marked by the low of the 12th of September.
It looks like that the RSI has topped near 72 and now has shifted more to the downside. The MACD has topped as well and dropped below its trigger line. Both these studies suggest further weakness and support somewhat the case for the pair to correct lower for a bit.
In order to start aiming for higher levels again, we would need to see GBP/USD moving back above the aforementioned upside support line and also to see a close above 1.3215 area. This way we could get a bit more confident that the pair could travel towards the 1.3270 resistance level, marked by the high of the 17th of July. Slightly above that lies the next good potential area of resistance near the 1.3295, which held the rate on the 16th of July.
Back to the monetary policy front, we have two G10 central banks deciding on interest rates today: the SNB and the Norges Bank.
Kicking off with the SNB, the Bank is expected to keep borrowing costs unchanged at -0.75%. Latest CPI data showed that Switzerland’s inflation rate remained unchanged at +1.2% yoy in August, which is above the SNB’s inflation projections for Q3, but still distant of the Bank’s 2% objective. According to their latest projections, SNB policymakers expect inflation to exceed their target in Q1 2021, conditional upon interest rates staying at current levels over the entire forecast horizon.
Thus, we don’t expect this meeting to paint a different picture than the previous one. Following the latest appreciation of the Swiss Franc, we expect officials to repeat that the franc remains highly valued, and to reiterate their readiness to intervene in the FX market if needed.
Now, passing the ball to the Norges Bank, expectations are for this Bank to increase rates to +0.75% from +0.50%. When they last met, Norwegian policymakers noted that the key policy rate would most likely be raised in September 2018, and this what they are expected to do.
Latest inflation data showed that headline inflation accelerated to +3.4% yoy in August from +3.0% in July, well above the Bank’s estimate for the month, which is at +2.5% yoy, while the core rate rose to +1.9% yoy from +1.4%, which is also above the Bank’s forecast of +1.5% yoy for underlying inflation. The data supports the case for a rate hike at this meeting and suggests that the Bank may maintain its hawkish stance.
The headline inflation rate is well above the Bank’s target of 2.0%, while the core rate is now just a tick below that objective, which means that officials may remove from the statement the part saying that “underlying inflation was lower than the target” and perhaps note that it is now near the target. What’s more, in the quarterly monetary policy report, we see the case for the Bank to upgrade its inflation forecasts, and to revise up its projected rate path.
After its reversal on the 10th of September, USD/NOK continued to move lower, which led to a brake of the medium-term upside support line, taken from the low of the 27th of March. This may be seen as a sign that the Norwegian krone could keep strengthening in the near term. Given all that, we will take a bearish stance on USD/NOK for now.
At the time of this report, the pair is resting on the 8.144 support level, a break of which could open the way for a test of the 8.120 area, marked near the lows of the 26th and 31st of July. A further decline could lead to a drop towards the 8.075 barrier, which acted as a support on the 17th of July. Below that sits another good potential support, which is near the 8.025 hurdle, last time seen stopping USD/NOK from dropping lower on the 11th of July.
Alternatively, if USD/NOK gets back above the aforementioned upside support line, this could spark some hope in the eyes of the bulls and it could interest them to try and take back control. If the pair gets lifted to the 8.265 level and eventually breaks it, this could invite more bulls to the table and USD/NOK could make its way towards the 8.313 obstacle, which acted as good support since the end of August up until the 12th of September, when the pair closed below it. Just above that sits another good potential resistance, the 8.343 barrier, slightly below the high of the 12th of September.
In the US we get the US existing home sales for August and the initial jobless claims for the week ended on the 14th of September.
During the Asian morning Friday, we get Japan’s National CPI data for August. No forecast is currently available for the headline rate, while the core rate is anticipated to have ticked up to +0.9% yoy from +0.8%. Both the Tokyo headline and core rates for the month rose, suggesting that the National rates may have moved in a similar fashion.
We also have two speakers scheduled for today: ECB Chief Economist Peter Praet and ECB Governing Council member Jens Weidmann.
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