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British Pound Faces a Bumpy Ride as BoE Weighs Outlook, Guidance

British Pound Faces a Bumpy Ride as BoE Weighs Outlook, Guidance

2013-08-07 01:00:00
John Kicklighter, Chief Strategist
Share:
  • Dollar: A Dove Warms to Taper, But Not Speculation
  • British Pound Faces a Bumpy Ride as BoE Weighs Outlook, Guidance
  • Australian Dollar Advances But Gains Limited after RBA Rate Cut
  • Euro Finds Little Comfort in Modest Italian GDP Beat
  • Japanese Yen Dangerously Close to Forging a Reversal
  • New Zealand Dollar Top Performer in Rebound after Dairy Export Scare
  • Gold Drops Below $1,300 Without Dollar’s Influence

Dollar: A Dove Warms to Taper, But Not Speculation

Despite another round of fundamental headlines that reinforces the probability of a September Taper timeframe from the Fed, the dollar took another tumble Tuesday. The session’s close marks the third consecutive decline for the Dow Jones FXCM Dollar Index (ticker = USDollar) – matching the worst performance for the benchmark currency in three months. Yet, in another unusual twist, the greenback’s slide happens to coincide with the biggest drop (0.6 percent) from the benchmark S&P 500 since June 24. Given the positive correlation between the favored safe-haven currency and risk-bearing equity index, this may not seem particularly out of place…but it certainly is. Should there be a committed move in speculative positioning – especially risk aversion – the negative relationship between index and currency is likely to return. So, once again, we are seeing some of the symptoms of a risk-based move but not the real conviction. Looking over the developments of this past session to establish our bearings moving forward, the June trade deficit dropped far more than expected to an October 2009 low of $34.2 billion (despite the rise in the dollar). Far more pertinent to our stimulus-supported markets nowadays, perpetual Fed dove Charles Evans offered suspiciously hawkish comments. Wednesday we have the Fed’s Pianalto and Plosser weighing in as well.

British Pound Faces a Bumpy Ride as BoE Weighs Outlook, Guidance

One of the top market-moving events for this week – and certainly the most ominous catalyst for Wednesday – is the Bank of England’s (BoE) inflation report. Sterling traders are still discounting a significant level of accommodation from the central bank as many believe the UK has ‘fallen behind’ in the stimulus game and the country risks falling back into recession without external support. However, economic data has reflected significant improvement in recent months and the BoE has backed off its previously moderate lean towards pursuing more easing. In fact, when new Governor Mark Carney took the helm for the first time at the July rate decision; the central bank not only kept its stimulus effort untouched, but the minutes showed the dissenters calling for more bond purchases in previous gatherings fell into consensus.

Despite the considerable divergence in expectations and outcome for UK monetary policy – GBPUSD dropped over 1,500 pips through the opening quarter in large part due to easing and recession concerns – we have yet to see a material retracement of the earlier losses. That is perhaps why we have seen such a strong reaction to data like manufacturing and service sector activity, housing and confidence surveys when they historically lack for influence. Therein lies the importance of the forthcoming quarterly inflation report from the BoE. This is not just an account on price pressures; it is an update on forecasts for all the important aspects for monetary policy. What’s more, in response to Chancellor of the Exchequer George Osborne’s request to review the remit, Governor Carney is expected to weigh in on whether the central bank will commit to forward guidance and perhaps even targets – like the Fed. More transparency at regular meetings could bolster speculation moving forward; but for this particular event, volatility and direction will come from the forecasts.

Australian Dollar Advances But Gains Limited after RBA Rate Cut

For a currency whose place amongst the ‘majors’ is established through its high-yield (carry) appeal, the Australian dollar’s appeal has taken a hit with the Reserve Bank of Australia’s (RBA) 7th rate cut in the past two years. And yet, despite a slide to a record low 2.50 percent benchmark yield; the Aussie dollar actually advanced against most counterparts through Tuesday’s trading session. This is a good example of two distinct truths about trading fundamentals in the markets: investors/traders are forward looking and the mass’ interpretation of a development is more important than the sterile academic interpretation. For this particular rate decision, the market was certain of the rate cut with 26 of 27 economists polled by Bloomberg expecting the move and swaps pricing in a 100 percent probability. In other words, the market was positioned for the cut and looking for guidance for future moves. What they read in the statement though, was a shift away from proactive easing.

Euro Finds Little Comfort in Modest Italian GDP BeatLike the Spanish release last week, Italy’s 2Q GDP update generated relatively little interest from the Euro. The Eurozone’s third largest economy posted a 0.2 percent contraction in the period through June – a smaller-than-expected slump but the 8th consecutive reduction nevertheless. There was fodder from this outcome to feed both the bulls and the bears if they so had the inclination. Yet, just as the sovereign and regional banking concerns that have shifted to the backdrop, so too has the immediate fear of the costs of ongoing recessions. In a market that is familiar with complacency, the Euro-area is perhaps the most detached. (New to EUR/USD trading? Watch this video).

Japanese Yen Dangerously Close to Forging a Reversal

The Japanese yen has slowly regained traction against its most significant counterparts and now faces a critical threshold to upgrading its intentions from drift to committed rally. Among the pairs to watch, USDJPY has dropped for 10-consecutive 8-hour candles for the most consistent decline in years, EURJPY stands at the cusp of a trend reversal at 130 and AUDJPY is just barely holding back from a deeper decline below 87.50. The spark that will make or break this move will not be Thursday’s BoJ but rather the Nikkei 225’s trend.

New Zealand Dollar Top Performer in Rebound after Dairy Export Scare

Despite unfavorable risk winds in international markets, the New Zealand dollar was the best performer over the past trading session. This change in performance is in stark contrast to the way the kiwi opened the week with a gap lower on the panic that arose after China announced a ban on certain dairy imports from New Zealand after it was discovered that export leader Fonterra sent product that may have contained botulism. Finance Minister English talked down the economic impact this would have, and this kiwi rebound will likely run out of steam quickly.

Gold Drops Below $1,300 Without Dollar’s Influence

A hearty 1.6 percent drop from gold Tuesday, carried the precious metal back below $1,300 for the first time since July 19. This acts as further confirmation that the prevailing bear trend that was established last September has reengaged after another failed revival through July. Yet, what makes this past session’s progress particularly interesting is that it developed without the support of the US dollar – the benchmark for measuring its anti-currency appeal. Those fearing a disorderly drop, the CBOE’s volatility index is steady and volume is so far restrained.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:30

AUD

Home Loans (JUN)

2.0%

1.8%

Home loans have continued to show growth in 2013 despite a downturn in the mining industry due to slower growth in China.

1:30

AUD

Investment Lending (JUN)

1.5%

1:30

AUD

Value of Loans (MoM) (JUN)

2.3%

5:45

CHF

SECO Consumer Confidence (JUL)

-1

-5

The print has not been positive since January of 2011.

6:30

EUR

Bank of France Business Sentiment (JUL)

97

96

French trade balance has remained below -400M since September of 2010.

6:45

EUR

French Trade Balance (euros) (JUN)

-5350M

-6014M

7:00

CHF

Foreign Currency Reserves (JUL)

431.0B

434.9B

Since September of 2011, CPI YoY has remained negative in Switzerland. Meanwhile, Foreign Currency Reserves continue to rise as the SNB continues to suppress the strengthening of the Franc against the Euro.

7:15

CHF

Consumer Price Index (MoM) (JUL)

-0.4%

0.1%

7:15

CHF

Consumer Price Index (YoY) (JUL)

-0.1%

-0.1%

7:15

CHF

Consumer Price Index - EU Harmonised (MoM) (JUL)

0.2%

7:15

CHF

Consumer Price Index - EU Harmonised (YoY) (JUL)

0.2%

10:00

EUR

German Industrial Production s.a. (MoM) (JUN)

0.2%

-1.0%

German Industrial Production continues to flirt with negative growth in its volatile swings. Although April saw growth of 2%, the last print missed estimates coming in a -1.0%.

10:00

EUR

German Industrial Prod n.s.a. and w.d.a. (YoY) (JUN)

-0.4%

-1.0%

11:00

USD

MBA Mortgage Applications (AUG 2)

-3.7%

Negative since the June 7th print. The Federal Reserve may take note of the impact recent interest rate rises have had on new applications.

12:30

CAD

Building Permits (MoM) (JUN)

4.5%

The May print of 4.5% blew past estimates of -5.2%.

14:00

CAD

Ivey Purchasing Managers Index s.a. (JUL)

56.0

55.3

14:30

USD

DOE U.S. Crude Oil Inventories (AUG 2)

431K

Traders will be looking to inventory levels as prices in WTI crude oil futures are down 2.4% so far this month.

14:30

USD

DOE U.S. Distillate Inventory (AUG 2)

-466K

14:30

USD

DOE U.S. Gasoline Inventories (AUG 2)

770K

19:00

USD

Consumer Credit (JUN)

$15.00B

$19.615B

A higher print may indicate more confidence on the part of consumers to take on debt.

23:50

JPY

Japan Buying Foreign Bonds (Yen) (AUG 2)

233.2B

This data will provide a good backdrop ahead of the event risk on Thursday: BoJ Monetary Policy Statement and Rate Decision. Most watched by market participants will be the trade balance. An improvement here means that Abenomics and hence the weaker JPY is having a positive impact on export growth. Trade balance must improve in Japan in order to keep bond holders at ease. Japan currently has the highest debt-to-gdp ratio in the word and improving exports is key to confidence in the economy.

23:50

JPY

Japan Buying Foreign Stocks (Yen) (AUG 2)

-154.9B

23:50

JPY

Foreign Buying Japan Bonds (Yen) (AUG 2)

-430.3B

23:50

JPY

Foreign Buying Japan Stocks (Yen) (AUG 2)

-61.8B

23:50

JPY

Trade Balance - BOP Basis (Yen) (JUN)

-128.7B

-906.7B

23:50

JPY

BoP- Current Account Balance (YoY) (JUN)

-3.5%

58.1%

23:50

JPY

Adjusted Current Account Total (Yen) (JUN)

727.3B

623.3B

23:50

JPY

Current Account Total (Yen) (JUN)

396.5B

540.7B

23:50

JPY

Housing Loans (YoY) (2Q)

3.2%

23:50

JPY

Bank Lending Banks ex Trusts (YoY) (JUL)

2.2%

23:50

JPY

Bank Lending Banks inc Trusts (YoY) (JUL)

1.9%

1.9%

GMT

Currency

Upcoming Events & Speeches

1:00

AUD

Australia to Sell A$1 Bln in 12-Year Bonds

9:30

GBP

Bank of England Inflation Report

16:30

USD

Fed's Charles Plosser Speaks on U.S. Economy

17:00

USD

US to Sell $24 Bln in 10-Year Notes

17:40

USD

Fed's Sandra Pianalto Speaks on Monetary Policy

(Thur)

JPY

BoJ Rate Decision

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.4800

2.0000

10.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.2000

1.9500

10.2500

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

12.6308

1.9266

9.9359

7.7564

1.2685

Spot

6.5543

5.6065

5.9221

Support 1

12.6000

1.9100

9.3700

7.7490

1.2000

Support 1

6.0800

5.6000

5.8700

Support 2

12.0000

1.6500

8.9500

7.7450

1.1800

Support 2

5.8085

5.4440

5.7400

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3410

1.5467

98.62

0.9344

1.0458

0.9076

0.7993

131.02

1308.75

Res 2

1.3383

1.5434

98.31

0.9322

1.0439

0.9050

0.7968

130.65

1300.79

Res 1

1.3355

1.5401

98.00

0.9300

1.0419

0.9023

0.7944

130.27

1292.83

Spot

1.3300

1.5335

97.39

0.9255

1.0380

0.8969

0.7896

129.52

1276.91

Supp 1

1.3245

1.5269

96.78

0.9210

1.0341

0.8915

0.7848

128.77

1260.99

Supp 2

1.3217

1.5236

96.47

0.9188

1.0321

0.8888

0.7824

128.39

1300.79

Supp 3

1.3190

1.5203

96.16

0.9166

1.0302

0.8862

0.7799

128.02

1308.75

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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