Yesterday, the BoE kept is policy and forward guidance unchanged, with the pound gaining around 80 pips at the time of the release. However, the currency was quick to give back those gains and to trade even lower, underperforming again all the other G10 currencies, due to fears of a hard Brexit in December next year. Elsewhere, the Riksbank hiked rates to zero and noted that they will stay there in the coming years, while the Norges Bank stood pat, reiterating that the rate will most likely remain at the current level in the coming period.
The pound kept tumbling on Thursday and during the Asian morning Friday, underperforming once again all the other G10 currencies. The British currency lost the most ground against NOK, JPY and NZD in that order, while it underperformed the least against CAD.
Yesterday, we had a BoE policy decision. The Bank once again voted to keep interest unchanged at 0.75% via a 7-2 vote, with MPC members Haskel and Saunders maintaining their votes with regards to a rate cut. The Bank noted that there is no evidence yet about the extent to which uncertainty has declined following the latest elections and reiterated 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. Officials also repeated that if the 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.
In our view, the key message remains the same as in the previous meeting. The Bank is in a standby mode, waiting to see how political developments will unfold, and that there is still decent chance for a rate cut in the months to come. According to the UK OIS (Overnight Index Swaps), there is around 50% chance for a quarter-point cut by December next year.
The pound gained around 80 pips at the time of the release, with no clear catalyst behind the advance. In our view, it could be the Bank’s acknowledgment that global growth has shown tentative signs of stabilizing and that global financial conditions remain supportive. “The partial de-escalation of the US-China trade war provides some additional support to the outlook relative to the November Report, although trade tensions remain elevated”, the Bank also added.
However, the currency was quick to give back those gains and continue the down road it took this week after UK PM Johnson decided to set a hard deadline for negotiations over trade with the EU, which revived fears over a hard Brexit. With the last BoE gathering for the year now out of the way, GBP traders are likely to keep their gaze locked on developments surrounding the political scene. As four our view, even if the Withdrawal Bill is passed through Parliament, this appears to be largely priced by the recovery heading into the December 12th election, as well as by the aftermath rally. Now, all the attention appears to have turned to news and developments surrounding the transition period and with Johnson insisting on its hard lines, we believe that there is room for further declines in the British currency.
GBP/JPY traded south yesterday, breaking below the upside support line drawn from the low of November 22nd, as well as below 143.10. This combined with the fact that the rate is trading below the downside line drawn from the high of December 13th, keeps the short-term outlook somewhat negative.
Yesterday’s slide was stopped near the 142.00 barrier, and before we start examining further declines, we would like to see a decisive dip below 141.75, which provided decent resistance between November 27th and December 3rd. Such a dip may initially pave the way towards the 140.90 zone, the break of which may extend the fall towards the psychological round number of 140.00, also marked as a support by the lows of November 26th and 27th.
Shifting attention to our short-term oscillators, we see that the RSI hit support near 30 and turned flat, while the MACD, although below both zero and trigger lines, shows signs it could start bottoming. Both indicators detect negative momentum, but their flattening suggests that a small corrective bounce may be in the works before the next leg lower.
On the upside, we would like to see a strong break back above 143.85 before we abandon the bearish case and start examining whether the bulls have gained the upper hand. Such a move could see scope for upside extensions towards the 145.05 hurdle, the break of which may open the path towards the high of December 17th, at around 145.70.
Apart from the BoE, we also had two more central banks deciding on interest rates: the Riksbank and the Norges Bank. As was widely anticipated, the Riksbank hiked rates by 25bps to 0%, becoming the first Bank to abandon the negative-rate regime, after adopting it back in 2015. The world’s oldest central bank noted that since the October meeting, developments have been broadly inline with its expectations, and that’s why they decided to hike, inline with their October forecast. Officials also said that the rate is expected to remain at 0% in the coming years.
However, they added that if the economic outlook and inflation prospects were to change, monetary policy may need to be adjusted. Improved prospects would justify higher rates, but a weaker-than-forecasted economy may warrant a rate cut, as well as other measures. This kept on the table a chance that rates could return into negative territory, and that’s why SEK weakened somewhat against its US counterpart.
Passing the ball to the Norges Bank, the Bank kept its policy and forward guidance unchanged, reiterating that the rate will most likely remain at the current level in the coming period. The policy rate forecast is broadly unchanged from the September Report, officials noted, but they added that inflation is close to the target that that the krone depreciation will likely push consumer prices up somewhat. NOK traded higher at the time of the release, perhaps on the part saying that inflation could edge higher. However, the irony is that further strengthening of the Krone could prevent that. Thus, the NOK could keep strengthening somewhat more, but not for long, as this would dampen inflation and may risk a dovish turn by the Norges Bank.
USD/NOK traded lower yesterday, but hit support at 8.945 and then, it rebounded somewhat. Overall, the pair is printing lower highs and lower lows below the 9.076 hurdle, which acted as the lower boundary of the sideways range that contained the price action from October 31st until December 12th. Thus, we would consider the short-term outlook to be negative for now.
The current rebound may continue for a while more, perhaps even back above 8.987. However, the bears may jump back into the action from near or below 9.040, and perhaps drive the battle back down for another test at 8.945. If that level is broken as well, we may experience extensions towards the 8.912 territory, which provided strong support between September 9th and 17th.
The RSI has flattened near its 30 line, while the MACD, although below both its zero and trigger lines, shows signs of bottoming. Both indicators suggest slowing downside speed and corroborate our view for some further upside correction before, and if, the bears take the reins again.
On the upside, we would like to see a break back above 9.100 before we abandon the bearish case. Such a move would confirm the rate’s return back within the aforementioned range, and may allow advances towards 9.140. Another break, above 9.140, could set the stage towards the 9.180 barrier, slightly below the peak of December 11th.
We get the final GDP data from the UK and the US. Both are expected to confirm their second estimates. From the US, we also get personal income and spending for November, as well as the core PCE index for the month. Income is forecast to have increased 0.3% mom after stagnating in October, while the spending rate is anticipated to have ticked up to +0.4% mom from +0.3%. The yoy core PCE rate is forecast to have held steady +1.6% yoy.
From Canada, we have retail sales for October. Headline sales are expected to have increased 0.5% mom, after sliding -0.1% in September. The core rate is forecast to have ticked up to +0.3% from +0.2%.
We also have one speaker on today’s agenda: BoE MPC member Jonathan Haskel. He is one of the two members that have been voting for a BoE rate cut and thus, it would be interesting to hear why he believes such a move is warranted now.
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