Daily analysis | 12 September 2017
Today, GBP traders will have their gaze locked on the UK CPI data for August. Expectations are for both the headline and core rates to have risen, something we agree with, given that the nation’s services PMI for the month showed that firms increased their prices charged at the highest rate since April. The recent depreciation of the pound against the euro supports further the case for accelerating inflation.
Even though a rebound in the CPI rates could support the pound and revive some speculation with regards to a BoE rate hike in the near term, we remain skeptical on that prospect. A few months ago, BoE Governor Mark Carney made it clear that a rate hike may depend mainly on firming wages and improving business investment. Given that business investment for Q2 was stagnant, we doubt that an actual rate hike is looming for now. However, if inflation indeed accelerates today and wages also accelerate tomorrow as anticipated, we would not rule out a slightly more hawkish tone from the BoE when it meets on Thursday.
GBP/USD traded lower yesterday after it hit again resistance at 1.3225 (R1). Nevertheless, the slide was stopped by the 1.3160 (S1) level. The price structure on the 4-hour chart suggests a short-term uptrend as marked by the short-term uptrend line drawn from the low of the 24th of August. As such, we expect the bulls to take the reins again soon and aim for another test near the 1.3225 (R1) line. The catalyst for such a rebound may be accelerating UK CPIs today. If the rebound is strong enough to overcome the 1.3225 (R1) resistance, then we may experience extensions towards our next obstacle of 1.3270 (R2).
Dollar stages a minor comeback as risks recede.
The US dollar came under buying interest yesterday, reversing some of its recent losses, while US equity indices surged to close at, or near, all time high levels. We see two likely explanations for these market moves. Firstly, geopolitical risk receded somewhat after North Korea did not launch a missile for its anniversary over the weekend, as many may have expected. This seemingly drove investors out of the safety of US bonds, evident by the rise in Treasury yields, something that likely supported the dollar. In addition, the fact that Hurricane Irma has been less severe than anticipated so far, at least in terms of damage caused, may be another factor that supported the flight out of Treasuries and into equities.
In our view, the dollar’s broader outlook remains cautiously negative, amid an uncertain geopolitical outlook that frequently drives flows into Treasuries, relatively uninspiring US economic data, and subdued expectations for Fed rate hikes in the near-term. That said, we have to note that the pace of the currency’s depreciation has slowed substantially compared to recent months, which could be a preliminary sign that the greenback is trying to carve out a bottom. The US CPI data that are coming out on Thursday could play a critical role for the currency’s forthcoming direction.
USD/JPY surged yesterday, breaking back above the important resistance (now turned into support) barrier of 108.70 (S2). The rate is back within the sideways range that’s been in place since the 28th of July, between that barrier and the resistance zone of 111.00. Thus, we believe that the short-term outlook has turned back to neutral. Having said that though, we wouldn’t rule out further advances within the aforementioned range. At the time of writing, the pair is trading fractionally above the 109.25 (S1) line, and further advances could aim for the 109.85 (R1) resistance. A break above that zone could open the way for the 110.20 (R2) obstacle.
As for the rest of today’s highlights:
Besides the UK CPI’s, we get inflation data for August from Sweden as well. The forecast is for the headline CPI rate to have remained unchanged, while the CPIF rate is forecast to have ticked down, something that could weigh on SEK. In the US, the JOLTS job openings for July are coming out.We have only one speaker on the agenda: ECB Vice President Vitor Constancio. Following President Draghi’s remarks at the press conference after last week’s ECB policy meeting that the Bank should be ready to take the bulk of a decision on QE in October, we will monitor the Vice President’s comments for more clues on that front.
- Support: 1.3160 (S1), 1.3120 (S2), 1.3060 (S3)
- Resistance: 1.3225 (R1), 1.3270 (R2), 1.3360 (R3)
- Support: 109.25 (S1), 108.70 (S2), 108.10 (S3)
- Resistance: 109.85 (R1), 110.20 (R2), 110.65 (R3)
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