Daily analysis | 15 September 2017
Bank of England holds interest rates, GBP rallies
The BoE kept its policy unchanged yesterday via a 7-2 vote, as was widely anticipated. In line with our view, the Bank tilted hawkish, signaling that some withdrawal of stimulus is likely over the coming months in order for inflation to return to a sustainable to target. In addition, officials reiterated that policy may need to be tightened faster than the market currently expects if the economy grows as expected. Sterling surged in the aftermath of the decision, as the implied probability for a rate hike by year-end rose to 68%.
Moving forward, we believe that the most important upcoming data points to watch may be wages and inflation, as they could determine whether a hike will actually materialise in the next months. Of course, business investment is critical as well, but we will not be getting updated prints for Q3 until late November. As for sterling, we think that its outlook remains positive in the near-term, as the market continues to focus on the prospect of a rate hike by the BoE soon. Looking further ahead, however, we think that the continued delays and the uncertainty surrounding the Brexit negotiations could begin to weigh once again on the currency in a few months, especially if the BoE under-delivers with any future rate hikes.
GBP/USD surged yesterday following the BoE’s hawkish signals. The rate rebounded from near the 1.3160 support and rallied to break above the 1.3360 (S1) hurdle. The price structure on the 4-hour chart continues to suggest a short-term uptrend and thus, we believe that the break above 1.3360 (S1) may have opened the way for our next obstacle of 1.3450 (R1). Having said that though, given that the rally appears overextended, we would stay careful of a corrective setback before the bulls take charge again.
As for the bigger picture, the rate continues to trade above the medium-term upside support line taken from back at the low of the 7th of October. Actually, the latest recovery started after the rate rebounded from that line. This is another point enhancing our view that the rate could continue trading north for a while, perhaps until it tests the long-term downside resistance line, drawn from the peaks of July 2014.
North Korea strikes again, but JPY can’t hold onto gains.
Overnight, North Korea launched yet another missile that flew over Japan to land in the Pacific Ocean. The yen strengthened on the news but quickly gave back its gains to trade relatively unchanged in the following minutes. We see three potential reasons for this rapid pullback.
Firstly, this strike probably came as a surprise to nobody given North Korea’s provocative warnings in recent days. As early as yesterday, the regime threatened to sink Japan and turn the US to “ashes and darkness”. What’s more, there may be a diminishing impact on any market reaction given how frequently this has occurred in recent weeks. Finally, the inability of the JPY to hold onto gains may be partly due to USD dip-demand, amid encouraging signals about tax reform. Overnight, US Secretary Treasury Mnuchin said that tax plan details will be released in the week September 25-29. We see the prospect for the dollar to continue recovering overall in the next days, potentially fueled by optimistic remarks on this subject.
USD/JPY tumbled overnight following North Korea’s missile launch. However, the bulls were quick to take advantage of the dip and drive the battle higher. The rate recovered all the missile-related losses and during the European morning Friday, it looks to be headed towards the 111.00 (R1) key resistance. The pair continues to trade within the sideways range that’s been in place since the 28th of July, between that key resistance and the support zone of 108.70 (S1). As such, we still believe that the short-term outlook is flat for now. We would like to see a decisive break above 111.00 (R1) before we get confident on larger bullish extensions.
In the US, the headline retail sales rate for August is expected to have declined, while the core one is anticipated to have held steady. This combination could weigh on the dollar somewhat, but given the recent theme of tax reform, any dip in USD could remain relatively short-lived. We also get the nation’s NY Fed manufacturing and U of M consumer sentiment indices, both for September, as well as industrial production for August.
There’s only one major speaker on the schedule: BoE MPC member Gertjan Vlieghe.
- Support: 1.3360 (S1), 1.3320 (S2), 1.3225 (S3)
- Resistance: 1.3450 (R1), 1.3500 (R2), 1.3550 (R3)
- Support: 110.10 (S1), 109.55 (S2), 109.25 (S3)
- Resistance: 111.00 (R1), 111.70 (R2), 112.20 (R3)
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