Analys från DailyFX
BoE Outlines Forward Guidance but Sterling Surges
ASIA/EUROPE FOREX NEWS WRAP
Warning: plot twist ahead. Markets were widely expecting a dovish Governor Mark Carney today when the Bank of England released its Quarterly Inflation Report (QIR), but that was far from the case.
True, the BoE implemented a more detailed version of its forward guidance policy, tethering its key interest rate (currently at 0.50% where it has been since March 2009) to the Unemployment Rate (7.0%, now at 7.8%), a move akin to what the Federal Reserve has done in recent months.
Beyond the promise of low rates through mid-2016, the QIR was much less dovish than anticipated and the forward guidance strategy turned out to have a rather hawkish backdrop. The positivity – and change in my tune – comes from the BoE’s revision to the growth forecast, improved to +1.5% from +1.2% for 2013, and to +2.7% from +1.9% for 2014.
Certainly, the recent uptick in British economic data aligns with optimism from the BoE, but the real kicker – and what I believe to be the main underlying reason for extravagant British Pound strength this morning – is the inflation ‘circuit breaker.’ Governor Carney noted that if inflation is at 2.5% in 12- to 18-months, the forward guidance strategy – to keep the main interest rate at 0.50% into the 3Q’16 – would be invalidated.
Thus, with headline inflation at +2.9% y/y currently, the British economy has technically breached the circuit breaker level already. Moreover, the BoE has consistently underestimated inflation (so its forecast for slowing inflation has been taken with a grain of salt), leading market participants to believe that the 2.5% circuit breaker threshold will be easily breached.
In a sense, the market may be reacting as if the BoE just outlined its exit strategy, even as Governor Carney said that the central bank stood ready to implement more QE. As long as data stays on its recent upswing, it’s hard to believe that more QE is coming; and today’s QIR is certainly optimistic for the Sterling.
Read more: BoE Links Interest Rate to Unemployment, but Pound Rallies on Inflation “Knockout”
RELATIVE PERFORMANCE (versus USD): 10:30 GMT
JPY: +0.62%
GBP: +0.27%
EUR: +0.11%
CHF:+0.08%
NZD:-0.04%
CAD: -0.36%
AUD:-0.50%
Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.10% (-0.34% prior 5-days)
ECONOMIC CALENDAR – UPCOMING NORTH AMERICAN SESSION
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TECHNICAL ANALYSIS – CHART OF THE DAY
GBPJPY – From the April low to the May high, the pair has found support consistently in the ¥147.15/8.15 zone, with the 50% Fib retracement at 148.57 and the 61.8% Fib retracement at 146.63 serving as important support as well. Today’s reactionary selloff on the BoE headlines saw the pair trade down into this key zone and rebound sharply. Gains may be tempered with the Bank of Japan set to meet and keep its policy on hold, while technically speaking, a major top may be in now that the Symmetrical Triangle from May to July has broken lower. Bearishness would be invalidated above 151.60.
— Written by Christopher Vecchio, Currency Analyst
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
What’s inside:
- EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
- Resistance in vicinity of 11825/80 likely to keep a lid on further strength
- Targeting the low to mid-11600s with more selling
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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.
Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.
Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).
Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.
For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.
EURUSD: Daily
—Written by Paul Robinson, Market Analyst
You can receive Paul’s analysis directly via email bysigning up here.
You can follow Paul on Twitter at@PaulRobinonFX.
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.
GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.
— Written by Christopher Vecchio, CFA, Senior Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
Follow him on Twitter at @CVecchioFX
To be added to Christopher’s e-mail distribution list, please fill out this form
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