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by Charalambos Pissouros

NZD Falls on Jobs Data, BoE Takes Center Stage

The Kiwi was the main loser among the G10 currencies, tumbling after the disappointment in New Zealand’s employment data, which may have prompted investors to increase their bets with regards to a rate cut by the RBNZ. As for today, the spotlight is likely to fall on the BoE. It is a “Super Thursday” for the Bank, as besides the rate decision and the meeting minutes, we will also get the quarterly Inflation Report, as well as a press conference by Governor Mark Carney.

Kiwi Tumbles on Disappointing Jobs Data, Risk Appetite Eases Somewhat

The dollar continued gaining on Wednesday, against all the other G10 currencies. It gained the most against NZD, SEK, AUD and CAD in that order, while the currencies that slid the least were JPY, GBP and CHF.

USD performance G10 currencies

The big loser was the Kiwi, which collapsed following New Zealand’s worse-than-expected employment data for Q4. Specifically, the unemployment rate rose to 4.3% from 3.9%, missing estimates of 4.1%, while the employment change slowed to +0.1% qoq from +1.1% the previous quarter. Expectations were for a slowdown to 0.3% qoq.

New Zealand unemployment rate

The disappointment in the jobs report comes after GDP data showed that the economy slowed to +0.3% qoq in Q3 from +1.0% in Q2, well below the RBNZ's own estimate of +0.7%, and even though inflation numbers for Q4 came in somewhat better than expected, the weak release may have prompted investors to bring forth their expectations with regards to a rate cut. Officials may not be tempted to pull the easing trigger when they meet next week, but we expect Governor Orr to keep the prospect well on the table.

Given that the gathering will be also accompanied by the quarterly Monetary Policy Statement, which includes the Bank’s updated economic projections, we believe that there is a decent likelihood for policymakers to push back the timing of when they expect interest rates to start rising.  According to the November quarterly report, interest rates are expected to start rising in the second half of next year and hit 2.0% during the last quarter. Thus, we see the case for a 25bps increase to be pushed into 2021.

Apart from the Kiwi, the other commodity-linked currencies, AUD and CAD, stayed under selling interest as well, while the safe havens JPY and CHF, were among the currencies that underperformed the least against the greenback. Although the Aussie may have continued feeling the heat of RBA Governor Lowe’s remarks with regards to a rate cut, the broader pattern suggests a softening risk appetite. Indeed, EU indices closed the European session mixed yesterday, while the US ones ended their trading slightly in the red, perhaps weight on by disappointing revenue forecasts by videogame makers Electronic Arts Inc and Take-Two Interactive Software Inc. On top of that, following the nice rally since the turn of the year, investors may have decided to take a breather ahead of the next round of US-China trade talks, which is scheduled for next week, when US Treasury Secretary Steven Mnuchin will travel to China hoping that the two nations will come closer in resolving the dispute.

NZD/JPY – Technical Outlook

The weakness of the New Zealand dollar over the past two days managed to push NZD/JPY out of its rising channel formation through the lower bound of it. Even though, at some point soon, we might see a correction back up, still, if the rate stays below the lower end of the aforementioned changed, the pair may turn south again and continue sliding further. 

If NZD/JPY keeps moving lower, it may reach the 73.95 support zone, which is the low of January 24th. The pair could rebound from there, but if the rate fails to get back inside the rising channel formation, then we may see another leg of selling, which could lead to a break of the above-mentioned support area at 73.95. This could push NZD/JPY lower, to possibly test the 73.30 zone, marked by the low of January 22nd. 

On the other hand, we may abandon the downside idea, if NZD/JPY gets back into the rising channel and the rate climbs above the 74.56 resistance barrier, which on January 29th acted as good support. Such a move could clear the path to the 75.00 obstacle, a break of which could lift the pair a bit higher, towards the 75.30 barrier, marked by yesterday’s intraday swing high.  

NZD/JPY 4-hour chart technical analysis

Spotlight Falls on First BoE ‘Super Thursday’ for 2019

As for today, we have a central bank deciding on interest rates and that's the Bank of England. Actually, it is a “Super Thursday” for the Bank, as besides the rate decision and the meeting minutes, we will also get the quarterly Inflation Report, as well as a press conference by Governor Mark Carney.

Since the last time BoE officials met, and up until last week, data have been mixed. Although headline inflation slowed, the core rate ticked up. Both headline and core retail sales tumbled in December, though the unemployment rate declined, while average weekly earnings accelerated somewhat. That said, market participants kept their gaze locked on the Brexit sequel, with the latest episode being Parliament’s debate over May’s alternative Brexit plan, and the voting on amendments proposed by lawmakers. Although since the turn of the year investors had become confident that a no-deal Brexit could be avoided, the rejection of a proposal including a nine-month extension to Article 50 and the adamant stance of the EU to not renegotiate may have revived some fears on that front.  What’s more, the weakness in this week’s PMIs for January, especially in the service-sector index, may have added to concerns that a disorderly withdrawal from the EU would hurt the UK economy badly.

Having all that in mind, we don’t expect any policy change and we see the case for the statement and the minutes to pass more or less the same message as in December.  We believe that policymakers will repeat that an ongoing tightening would be appropriate at a gradual pace and to a limited extent, but also reiterate their concerns over Brexit. They could note that uncertainty on that front has intensified further. We also expect them to maintain the view that whatever form Brexit takes, interest rates could move in either direction, which means that the Bank could raise rates even in the case of a disorderly exit.

As we noted in the past, we agree with that view. Yes, a no-deal Brexit could hurt economic growth, but a potential slide in the pound could lift inflation up again. The Bank would have to assess the tradeoff and judge whether bringing inflation back to target is a priority compared to supporting economic activity, in which case it could increase rates. If the opposite is true, it may decide to cut. According to the latest data of the UK forward OIS (overnight index swaps) curve, market participants see only a 30% chance for a rate increase by December, while such a move is fully priced in for the summer of 2021.

UK overnight index swaps market rate expectations

Now, with regards to the Inflation Report, we expect the Bank to proceed with downside revisions, at least in the GDP forecasts. Even though the projections are based on the assumption of a smooth Brexit, we base our view on how the uncertainty surrounding that front has already weighed on economic activity, at least according to the January PMIs, also taking into account the economic slowdown on a global scale.

EUR/GBP – Technical Outlook

EUR/GBP continues to climb higher, after its reversal on January 25th. The pair keeps on printing higher highs and higher lows and is supported by a short-term upside line taken from that reversal-day low. For now, we will continue targeting higher areas, especially if EUR/GBP clears this week’s high, at 0.8820.

As mentioned above, in order to get comfortable with the upside, we need to see a break above this week’s high, at 0.8820, or even the high of January 22nd, which is at 0.8829. This way we may target the 50% Fibonacci retracement level, measured from January’s high to its low, which is at 0.8862, also marked by the peak of January 21st. This is where the rate could get held for a bit, or even correct slightly lower again. But as long as the pair keeps trading above the aforementioned upside line, we will continue targeting higher levels. Just a few pips above the 50% Fibonacci retracement lies another potential good resistance zone at 0.8880, marked by the high of the intraday swing high of January 16th.

Alternatively, a break of the previously-mentioned upside support line would place the rate below the 0.8772 support zone, which could invite the bears back into the game and push EUR/GBP further down. This is when we will start targeting the 0.8725 obstacle, a break of which may clear the path for a test of the 0.8710 hurdle, marked by the low of January 31st. 

EUR/GBP 4-hour chart technical analysis

As for the Rest of Today’s Events

Apart from the BoE decision, we get the US initial jobless claims for the week ended on Friday 1st. Expectations are for claims to have declined to 221k from 253k, something that would drive the 4-week moving average up to 221.5k from 220.25k.

As for tonight, during the Asian morning Friday, AUD-traders will be sitting on the edge of their seats in anticipation of the RBA’s quarterly Statement on Monetary Policy. Following Governor Lowe’s remarks over the prospect of a rate cut, market participants are likely to dig into the report for hints on how likely such a move is.

With regards to the speakers, besides BoE Governor Carney, we have three more on the agenda. ECB Executive Board Member Yves Mersch will speak during the European session, while around the US opening, Fed Vice Chair Richard Clarida will step up to the rostrum. During the Asian day Friday, we will get to hear from St. Louis Fed President James Bullard.

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