Daily analysis | 10 October 2017
Possible UK interest rates rise coming?
The British pound opened with a positive gap yesterday, and continued higher for most of the day, recovering some of the losses it posted last week. The move came as the Office for National Statistics (ONS) revised up its wage growth estimates for Q2. This probably heightened speculation for a near-term BoE rate hike, perhaps as early as at the November gathering. Meanwhile, the Conservative Party power struggle appears to be subsiding, at least for now, amid signals that PM May has managed to contain the rebellion within her Party and reports that she could even reshuffle her Cabinet if needed to maintain order.
That said, we doubt it will be all plain sailing for the pound. Even though the latest recovery may continue for a while more, we believe that any further gains may be relatively limited. A BoE rate hike by year-end is almost fully priced in by now, while another one is fully factored in by November next year, implying that for the pound to strengthen further from monetary policy developments, the BoE would need to hike now and signal more than one hikes in the upcoming year. In contrast, the domestic political uncertainty combined with the lack of any material progress in the Brexit negotiations are unlikely to go away anytime soon, and could continue to cloud the currency’s outlook over the next months, we think.
GBP/USD edged up on Monday, breaking above 1.3100 (S1) to test the 1.3180 (R1) resistance line. The price structure remains lower peaks and lower troughs below the downtrend line taken from the peak of the 20th of September and thus, the short-term outlook remains cautiously negative in our view. Nevertheless, given that the latest recovery appears strong, we prefer to take the sidelines for now and wait to see whether the bears are willing to take the reins from near the aforementioned trend line. If they do, then we may see them aiming for the 1.3100 (S1) support, where a dip may pave the way for another test near 1.3030 (S2). On the other hand, a break above the short-term downtrend line may initially target our next resistance of 1.3230 (R2).
The bigger picture enhances further our choice to stand pat for now. Although the short-term path remains to the downside, the latest rebound occurred from slightly above the upside support line is drawn from the low of the 7th of October 2016. This makes us mindful that the rebound may continue for a bit more.
EUR/GBP slid yesterday after it hit the 0.8985 (R1) resistance line. However, the setback was stopped by the crossroads of the prior downside resistance line taken from the peak of the 29th of August and the short-term upside support line drawn from the low of the 28th of September. Then the rate rebounded somewhat. Given that the pair continues to trade above both the aforementioned lines, we believe that the short-term outlook remains somewhat positive. The rebound may continue and perhaps challenge again 0.8985 (R1) in the days to come. A clear break above that level would confirm a forthcoming higher high on the 4-hour chart and may set the stage for more upside extensions, perhaps towards our next resistance of 0.9040 (R2).
In Norway, the CPI data for September have already been released. Both the headline and the core rates rose notably, albeit by slightly less than expected. Despite the negative reaction in NOK at the time of the release, we still consider this as a positive development for the Norges Bank, and we believe that this increases the likelihood of a more optimistic tone by policymakers at their next meeting.
From the UK, we get industrial production and trade balance data, all for August. Industrial production is expected to have accelerated, while the nation’s trade deficit is anticipated to have narrowed. Combined, these could support the pound somewhat, at least on the news.
In Canada, housing starts for September and building permits for August are due out.
We have two speakers on the agenda: Bank of Canada Deputy Governor Carolyn Wilkins and Minneapolis Fed President Neel Kashkari. Market participants may pay special attention to Wilkins, with any further signals that the BoC is becoming more concerned with the strength of CAD likely to bring the currency under renewed selling pressure.
- Support: 1.3100 (S1), 1.3030 (S2), 1.2980 (S3)
- Resistance: 1.3180 (R1), 1.3230 (R2), 1.3290 (R3)
- Support: 0.8900 (S1), 0.8850 (S2), 0.8800 (S3)
- Resistance: 0.8985 (R1), 0.9040 (R2), 0.9085 (R3)
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