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British Pound Volatility Risk as BoE Weighs in on Rate Forecast

British Pound Volatility Risk as BoE Weighs in on Rate Forecast

2014-05-14 04:00:00
John Kicklighter, Chief Currency Strategist
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Talking Points:

  • Dollar Advances on the Back of Its Counterparts
  • British Pound Volatility Risk as BoE Weighs in on Rate Forecast
  • Euro Marks a Key Breakdown On Historically Weak Event Risk

Dollar Advances on the Back of Its Counterparts

Where is the dollar’s strength coming from? The currency is up against all its major counterparts with the exception of the New Zealand dollar and the Dow Jones FXCM Dollar Index (ticker = USDollar) has put in for its first five-day consecutive climb in six months. Yet, there was little buoyancy to be found in the traditional outlets for strength. From the all-consumer ‘risk’ theme, we found the high profile S&P 500 holding to its record high with the same dubious aura of conviction that we have questioned over the past months. Meanwhile, the interest rate bearings for the dollar actually diminished this past session. Treasury yields slipped on the session throughout the curve. In the absence of a bid from safety appeal or yield forecasts, thecurrency still found substantial buoyancy in the weakness of its counterparts. A rate forecasts for the Euro and Pound offered a material, indirect bid ahead of substantial event risk from the two regions – just as effective as dollar-sourced strength.

While the dollar has found substantial lift from the weakness of its counterparts, this is not likely to be a source of drive that evolves into a substantive bull trend. Beyond the recent breakdown from EURUSD and the expected volatility from GBPUSD, greenback traders are looking ahead to Thursday’s CPI to revitalize interest rate speculation – for better or worse. The upstream PPI (Produce Price Index) for April is due in the upcoming session and will offer a lead in. And, of course, we should always be prepared for any unexpectedly swift ‘risk’ based moves.

British Pound Volatility Risk as BoE Weighs in on Rate Forecast

A retreat from the British pound this past session is likely a last-minute adjustment in anticipation of the Bank of England’s Quarterly Inflation report due today. The sterling slipped 0.3 percent against the US dollar and 0.1 percent versus the Japanese Yen. Compared to the currency’s imposing bullish bearings over the past year though, the correction hardly defuses the potential for volatility as the event risk taps into interest rate expectations. In the months since the UK began its booming economic recovery and Mark Carney took over the BoE last summer, the pound has rallied against all of its counterparts – with a noble 12 percent climb for GBPUSD. Central to the currency’s buoyancy in recent months is the belief that the central bank is on track to begin a hawkish rate regime well before its major counterparties – including the Fed. Whether we look at bond yields or swap rates, the market’s hawkish lean is the strongest in three years. While data has improved and the BoE has long moved away from QE, a hike in the first few months of 2015 or final months of this year is difficult to live up to. The level of hawkish tone the market needs to sustain its run is high. Meanwhile, the possible sterling retreat should the dovish tone remain would be severe.

Euro Marks a Key Breakdown on Historically Weak Event Risk

The Euro’s sharp retreat this past week was the distinctly the impetus of the ECB’s stimulus threat. Given the heft of the fundamental push needed to force the EURUSD and EURGBP retreat, the next step to break critical support (1.3750 and 0.8150 respectively) would theoretically have to be astounding. This past trading session, a disappointing Eurozone ZEW investor sentiment survey aligned nicely to the Euro’s slide. Yet, historically this indicator has struggled to draw more than 10 pip move from the currency. While the level of surprise is a factor, the real change is the underlying shift in expectations. Moving towards stimulus has the market looking for evidence of capital outflow.

Japanese Yen Crosses Find Limited Lift from S&P 500

While the S&P 500 – as a benchmark for risk appetite – is hovering at record highs, the yen crosses are showing little motivation to reverse recent range selloff much less return to their multi-year highs. The lack of conviction seen in these capital market benchmarks is laid bare with risk measures like the yen pairings. In the absence of a limitless stimulus vow from the BoJ, the market is more critical of the fundamental value for pairs like USDJPY and EURJPY. Beware, the one-month implied (expected) volatility reading on USDJPY is now at a record low.

Chinese Yuan Ticks Higher as Capital Markets Ebb after Weak Data

Data from the Chinese docket this past trading session was notably disappointing. As a broad view of the domestic economy, readings for April retail sales, fixed assets and industrial production all managed to fall short of consensus – though not in a material way as is the habit of Chinese data. The economic pinch was modest according to the Shanghai Composite and local yields. Traders watching USDCNH have noticed that the rebound of the past week has stalled and broken lower. Unless general risk and Emerging Market appetite builds though, ambitions will be low.

Emerging Markets: Ruble Closes at 3-Month High While Group ETF Hits 6-Month Peak

The MSCI Emerging Market ETF rose another 0.4 percent this past session. While modest, this nevertheless pushes the benchmark to its highest level in six months. Meanwhile, the Bloomberg EM Sovereign Bond Index is trading just off a record high of its own. Appetite for investment into the riskier class is showing preference for asset type – typically a sign of trepidation. In the FX rankings, the performance was broadly split. However, a 0.7 percent rally for the Russian Ruble and 0.6 percent rally for the Indian Rupee lead the gainers.

Gold Contracts within Range as Inflation and Rate Updates Approach

Volatility readings on gold are fading – a concerning development rather than reassuring. While the retreat in the CBOE Gold Volatility Index to a 13-month low is encouraging for stability following last April’s collapse for the metal, the more immediate active measures come with a more contrarian sensation. Gold has worked its way into a tighter trading band having deferred to complacency between $1,315 and $1,275 over the past six weeks. With event risk weighing in on US, Eurozone and UK inflation and rate forecasts over the next 48 hours, be wary.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

3:00

NZD

Nonresidential Bond Holdings (APR)

62.8%

A delayed measure of carry interest

6:00

JPY

Japan Machine Tool Orders (APR P)

41.8%

March pace fastest since June 2011

6:00

EUR

Germany Consumer Price Index CPI (APR F)

-0.2%

-0.2%

Any miss here would likely contribute to further downside EUR price action in the context of last week’s ECB meeting.

6:45

EUR

France Consumer Price Index CPI (APR)

0.1%

0.4%

7:00

EUR

Spain CPI (APR)

8:30

GBP

UK Jobless Claims Change (APR)

-30.0K

-30.4K

Labour statistics are key to economic expectations, but the BoE report will likely carry more rate speculation

8:30

GBP

ILO Jobless Rate (MAR)

9:30

EUR

Italy General Government Debt (MAR)

2107.2B

February’s record high contradicts the general EZ move to reduce debt

9:00

EUR

Eurozone Industrial Production (MARY)

-0.3%

0.2%

An expected contraction could turn factory activity into a GDP weight

9:00

CHF

Switzerland Investor Sentiment - ZEW (MAY)

7.0

Investor sentiment survey

10:00

EUR

Ireland Trade Balance (MAR)

€3,210M

Domestic activity has improved, but exports remain an important lifeline for strength

11:00

USD

US Mortgage Applications - MBA (May 9)

5.3%

A notable downturn in housing data has homeowners fearing another bubble

12:30

USD

US Factory Inflation PPI (APR)

1.7%

1.4%

An upstream inflation measure to benchmark the CPI due Thursday

13:00

CAD

Canada Home Inflation - Teranet (APR)

4.6%

Any pronounced weakness on the back of last week’s weak Canadian home data could impact CAD crosses to the downside.

14:30

-

US Crude Oil Inventories (May 9)

0K

-1781K

22:30

NZD

New Zealand Manufacturing PMI - BusinessNZ (APR)

58.4

The print has been on the rise since September.

23:50

JPY

Japan Tertiary Index (MAR)

2.2%

-1.0%

Price action in JPY crosses continues to surround price action in equities and bonds over actual Japanese data.

23:50

JPY

Japan Net Foreign Stock & Bond Investment (Apr 25)

23:50

JPY

Japan GDP (1Q P)

1.0%

0.2%

A critical measure of economic health for the BoJ focus on inflation and the pre-tax hike conditions

23:50

JPY

Japan Deflator (1Q P)

-0.1%

-0.3%

GMT

Currency

Upcoming Events & Speeches

0:05

NZD

RBNZ Gov Wheeler to Discuss Financial Stability at FSC

7:45

EUR

ECB's Weidmann, Mersch to Speak at Monetary Conference

8:30

EUR

Bank of Italy Public Finance Report

9:30

CHF

Switzerland to Sell Bonds

9:30

GBP

Bank of England Inflation Report

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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.1500

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.0904

2.1320

10.6238

7.7533

1.2569

Spot

6.5665

5.3928

5.9928

Support 1

12.9650

2.0700

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

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

1.3920

1.6900

103.18

0.8876

1.1093

0.9340

0.8641

142.89

1313.81

Res 2

1.3899

1.6877

102.99

0.8862

1.1076

0.9322

0.8623

142.60

1308.44

Res 1

1.3878

1.6854

102.81

0.8847

1.1059

0.9304

0.8604

142.31

1303.08

Spot

1.3837

1.6807

102.43

0.8817

1.1024

0.9268

0.8568

141.72

1292.35

Supp 1

1.3796

1.6760

102.05

0.8787

1.0989

0.9232

0.8532

141.13

1281.62

Supp 2

1.3775

1.6737

101.87

0.8772

1.0972

0.9214

0.8513

140.84

1276.26

Supp 3

1.3754

1.6714

101.68

0.8758

1.0955

0.9196

0.8495

140.55

1270.89

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

Sign up for John’s email distribution list, here.

The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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