Daily analysis | 14 September 2017
Today, the main event will be the Bank of England policy decision. As always, besides the rate decision, we will also get the minutes of the meeting. The consensus is for the Bank to keep its policy unchanged via a 7-2 vote. At its latest gathering, the Bank signalled little urgency for a rate hike in the next months, while it revised lower its inflation and economic growth forecasts. We think that the focus of this meeting will be initially on the vote count and subsequently, on what signals policymakers send regarding the likelihood of a near-term hike.
A few months ago, Governor Carney noted that a hike may depend mainly on firming wages and improving business investment. Given that business investment for Q2 was stagnant and that wages failed to accelerate in July, we doubt that an actual rate hike is looming. However, we have to note that the latest CPI data showed both the headline and the core inflation rates surging by more than anticipated in August, pushing the implied probability for a hike this year to 48%, according to the UK OIS. As such, even though we don’t expect an actual hike, we would not rule out the possibility of a slightly more hawkish narrative by the BoE, or even a 3rd policymaker voting for a hike. Bearing these in mind, we view the risks surrounding GBP today as being tilted to the upside. Any optimistic signals regarding a hike in coming months could add further fuel to the pound’s recent rally.
EUR/GBP traded in a consolidated manner yesterday, staying between the support of 0.8985 (S1) and the resistance of 0.9035 (R1). Having said that, given that the rate continues to trade below the short-term downtrend line taken from the peak of the 29th or August, we consider the short-term outlook to be negative. If indeed the BoE sounds more hawkish than previously today, or if we see another member joining those voting for a hike, the pair could break below 0.8985 (S1) and perhaps aim for our next support of 0.8920 (S2). On the other hand, softer language could be the trigger for a rebound. Nevertheless, as long as such a rebound remains limited below the aforementioned downtrend line, we would treat it as a corrective move and as a renewed opportunity for the bears to take charge at better levels.
USD continues to recover on the prospect of bipartisan tax reform.
Yesterday, US President Trump met with leaders of the Democratic Party to discuss tax reform. Later, both sides stated that the talks were “constructive”. Meanwhile, House Speaker Paul Ryan said that the outline of a tax plan would be unveiled as soon as the 25th of September. Both the dollar and US stock indices jumped on the news, possibly because investors interpreted these developments as raising the odds of tax changes actually materialising sooner rather than later.
Today, we get the nation’s CPI data for August. The forecast is for the headline rate to have ticked up and for the core rate to have ticked down. We view the risks surrounding the core forecast as likely being tilted to the upside, given that the Markit services PMI for the month showed output charges rising at a 35-month high. If our view is correct, this could ease somewhat the concerns of FOMC policymakers regarding subdued inflation, and perhaps revive market expectations for another rate hike this year. At the time of writing, the probability for another hike by year-end is 45% according to the Fed funds futures. A potential positive surprise in inflation could lift that percentage notably and thereby, help the dollar to recover even further.
EUR/USD tumbled on Wednesday, following the encouraging tax talks. The pair fell after it hit resistance at 1.2000 (R2) to break below the 1.1930 (R1) barrier. At the time of writing, the pair is testing the 1.1870 (S1) line, where a dip could bring into play the crossroads of the 1.1830 (S2) key support and the medium-term uptrend line taken from the low of the 17th of April. However, as long as the pair continues to trade above that critical territory, we believe that there is still the likelihood for a rebound. We would like to see a clear close below the aforementioned crossroads before we turn our gaze to the downside. This could happen if we see a positive surprise in US inflation today.
As for the rest of today’s highlights:
In Switzerland, the SNB will announce its rate decision as well and the forecast is for this Bank to take no action too. Policymakers could repeat the usual mantra – that the franc remains significantly overvalued and that the Bank will remain active in the FX market as necessary. Thus, if any reaction in CHF today, it may be lower.
We have just one speaker on the agenda: ECB Governing Council member Jens Weidman.
- Support: 0.8985 (S1), 0.8920 (S2), 0.8890 (S3)
- Resistance: 0.9035 (R1), 0.9070 (R2), 0.9120 (R3)
- Support: 1.1870 (S1), 1.1830 (S2), 1.1775 (S3)
- Resistance: 1.1930 (R1), 1.2000 (R2), 1.2100 (R3)
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