Daily analysis | 18 October 2017
Will UK interest rate hike be a one-off or will there be more to come?
Sterling took another dive yesterday, following some comments from BoE Governor Carney. His broader tone was not as hawkish as one would expect from a Governor ready to raise interest rates. Even though he reiterated the BoE’s view that “a hike in coming months may be appropriate”, the rest of his comments were on the cautious side, indicating for example that UK business investment has been surprisingly soft.
Despite the negative reaction in the currency and UK bond yields, we have to note that the probability for a November BoE rate hike remained more or less unchanged at 75%, according to the UK OIS. In our view, the key question facing market participants now is not so much if the Bank will actually hike in November, but whether that hike will be a one-off move, or whether it will be followed by more rate increases.
In this respect, we believe that the UK employment data for August we get today, and in particular wages, could be critical for the Bank and market expectations. The forecast is for the unemployment rate to have held steady, while average weekly earnings (excluding bonuses) are expected to have slowed somewhat. We view the risks surrounding the earnings forecast as likely tilted to the upside, considering that the Markit UK Report on Jobs for August showed growth of permanent starting salaries accelerating to the quickest rate since October 2015. In case of a positive surprise in wages, sterling could recover some of its latest losses, at least on the news.
EUR/GBP traded higher on Tuesday after it hit support near the 0.8860 (S1) barrier. Nevertheless, the recovery was paused near the 0.8925 (R1) resistance line. Bearing in mind that the pair is still trading above the prior downside resistance line drawn from the peak of the 29th of August, and also above the long-term uptrend line taken from the lows of November 2015, we see the likelihood for the rate to continue trading higher, at least for a while. A clear break above 0.8925 (R1) could confirm the case for more bullish extensions and may initially aim for the next resistance of 0.8985 (R2). Our short-term oscillators enhance our view further. The RSI rebounded and emerged back above its 50 line, while the MACD, although negative, has bottomed and crossed above its trigger line. It could turn positive soon.
NAFTA talks heighten volatility in CAD
Yesterday, the Loonie (as well as the Mexican peso) experienced heightened volatility, amid lots of NAFTA-related headlines. Both currencies initially dropped a little, after reports suggested that these nations would reject the US proposals. Nonetheless, the tumble was short-lived, with both CAD and MXN recovering their losses to trade even higher in the following hours, following the official statement from the trade ministers, which was more optimistic than market participants may have initially anticipated. The key message was that even though there are significant gaps in thinking between the three nations, all sides are committed to finding a solution that avoids scrapping the free-trade agreement. Moving forth, the attention of CAD-traders will now likely shift to the CPI data we get on Friday, which could determine the currency’s direction ahead of the BoC meeting next week.
USD/CAD spiked up yesterday, but hit resistance fractionally below 1.2600 (R1) and slid to hit support at 1.2485 (S1). The rate has been trading in a sideways manner between 1.2430 (S2) and 1.2600 (R1) since the 27th of September and thus, we consider the short-term outlook to be flat for now. A break below 1.2485 (S1) could target the lower bound of the range at 1.2430 (S2), but a decisive dip below the latter barrier is needed to confirm a forthcoming lower low on the 4-hour chart and turn the short-term outlook negative. Such a break may set the stage for extensions towards our next support of 1.2335 (S3).
As for the bigger picture, the rate continues to trade below the longer-term downtrend line taken from the peaks of May. In our view, this still keeps the outlook somewhat negative. A break below 1.2430 (S2) could confirm that the recovery started on the 8th of September was just a corrective phase and that the longer-term downtrend is back in force. On the upside, a break above the crossroads of the aforementioned downtrend line and the 1.2600 (R1) hurdle is needed before we start examining the case of a reversal.
Besides the UK jobs data, we also get the US building permits and housing starts for September.
We have four speakers on the agenda. With regards to the ECB, we will hear from President Draghi, as well as Executive Board members Praet and Coeure. Ahead of next week’s ECB gathering, their comments will most likely be scrutinized for any hints with regards to the speed of the QE tapering process. In the US, the influential President of the New York Fed, William Dudley, will deliver remarks.
- Support: 0.8860 (S1), 0.8800 (S2), 0.8760 (S3)
- Resistance: 0.8925 (R1), 0.8985 (R2), 0.9040 (R3)
- Support: 1.2485 (S1), 1.2430 (S2), 1.2335 (S3)
- Resistance: 1.2600 (R1), 1.2660 (R2), 1.2750 (R3)
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