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Dovish Bank of England (BoE) Rate-Hike to Rattle GBP/USD Resilience

Dovish Bank of England (BoE) Rate-Hike to Rattle GBP/USD Resilience

2017-10-30 14:45:00
David Song, Strategist
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Talking Points:

- Dovish BoE Rate-Hike to Rattle GBP/USD Resilience.

- NZD/USD Risks Fresh 2017-Lows as RSI Sits in Oversold Ahead of NZD Employment Report.

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DailyFX TableGBP/USD

The British Pound outperforms its major counterparts, with GBP/USD at risk staging a larger advance ahead of the Bank of England’s (BoE) ‘Super Thursday’ event as Governor Mark Carney and Co. are expected to lift the benchmark interest rate off of the record-low.

With Fitch Ratings affirming a AA credit-rating for the U.K., there’s growing speculation the BoE will deliver a 25bp in November as some members argue ‘a withdrawal of part of the stimulus that the Committee had injected in August last year would help to moderate the inflation overshoot while leaving monetary policy very supportive.’ In turn, a shift in policy paired with a more detailed exit-strategy may fuel the near-term resilience in GBP/USD, with the pair at risk of making a run at the 2017-high (1.3657) as it preserves the upward trend carried over from late-2016.

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However, a one-time rise in borrowing costs may ultimately foster a more bearish fate for the British Pound especially as Prime Minister Theresa May struggles to meet on common ground with U.K. & European Union (EU) officials. Heightening uncertainties surrounding ‘Brexit’ may continue to produce headwinds for Sterling as Fitch warns a no-deal ‘would hit the U.K. economy very hard and it could have a negative impact on the U.K. credit rating.’ As a result, the majority of the Monetary Policy Committee (MPC) may tame expectations for a series of rate-hikes as ‘there remained considerable risks to the outlook, which included the response of households, businesses and financial markets to developments related to the process of EU withdrawal.

GBP/USD Daily Chart

GBP/USD Daily Chart
  • Topside targets are coming back on the radar for GBP/USD following the failed attempt to close below the Fibonacci overlap around 1.3090 (38.2% retracement) to 1.3120, with the pair snapping back ahead of the monthly-low (1.3027).
  • Near-term outlook is becoming more constructive for GBP/USD as the pair appears to be breaking out of the descending channel carried over from September, with the Relative Strength Index (RSI) highlighting a similar dynamic.
  • In turn, the 1.3300 (100% expansion) to 1.3320 (38.2% retracement) region remains in focus as it sits just below the monthly-high (1.3402), with a break/close above the overlap opening up the next topside hurdle around 1.3370 (78.6% expansion) followed by the Fibonacci overlap around 1.3450 (23.6% retracement) to 1.3460 (50% retracement).
  • However, a break of the monthly-low (1.3027) raising the risk for a move back towards the former-resistance zone around 1.2950 (23.6% expansion) to 1.2960 (78.6% retracement), with the next downside region of interest coming in around 1.2800 (50% expansion) to 1.2860 (61.8% retracement), which sits just above the August-low (1.2774).
NZD/USD

NZD/USD carves a fresh series of higher highs & lows after failing to break the 2017-low (0.6818), with the pair at risk of staging a more meaningful correction as New Zealand’s 3Q Employment report is expected to show a pickup in both job and wage growth.

A 0.8% expansion in New Zealand Employment paired with a 1.1.% rise in Average Hourly Earnings may spark a bullish reaction in NZD/USD as it puts pressure on the Reserve Bank of New Zealand (RBNZ) to lift the cash rate from the record-low, but acting Governor Grant Spencer may have little choice but to endorse a wait-and-see approach for monetary policy as the coalition government under Prime Minister Jacinda Ardern pledges to review and revise the central bank’s mandate.

With that said, the shift in leadership may continue to dampen the appeal of the New Zealand dollar, with NZD/USD at risk of facing fresh 2017-lows as both price and the Relative Strength Index (RSI) preserve the bearish formations carried over from the summer months.

NZD/USD Daily Chart

NZD/USD Daily Chart
  • May see NZD/USD stage a larger rebound as it initiates a bullish sequence, with the first topside hurdle coming in around 0.6940 (61.8% expansion) to 0.6950 (38.2% retracement), but the pair remains at risk of facing fresh 2017-lows as long as the RSI holds below 30 and sits in oversold territory.
  • Break/close below the key support-zone around 0.6820 (23.6% retracement) to 0.6870 (50% retracement) opens up the next downside target around 0.6780 (100% expansion) followed by the 0.6710 (61.8% expansion) region.

Retail Sentiment

Retail Sentiment

Click Here to Learn How Shifts in Retail Position/Sentiment Impact Trend!

  • Retail trader data shows 57.5% of traders are net-long GBP/USD with the ratio of traders long to short at 1.35 to 1. The number of traders net-long is 1.6% lower than yesterday and 12.6% higher from last week, while the number of traders net-short is 9.6% higher than yesterday and 15.9% lower from last week.
  • Retail trader data shows 70.7% of traders are net-long NZD/USD with the ratio of traders long to short at 2.41 to 1. In fact, traders have remained net-long since October 18 when NZD/USD traded near 0.71709; price has moved 4.4% lower since then. The number of traders net-long is 11.3% higher than yesterday and 47.9% higher from last week, while the number of traders net-short is 22.2% higher than yesterday and 7.2% lower from last week.
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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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