Highlights:
- GBP/USD fell from 11-month high on lower forecasts despite Carney warning of tightening
- EUR strength continues as EUR/GBP breaks above 0.9000; regional signs point to strength
- Gold price extends above chart resistance; Oil supply shows encouraging development
- Sentiment Highlight: EUR/GBP shorts rise by 33% WoW, a contrarian bullish signal
The Sterling (a moniker for GBP) fell against the USD and all other counterparts of the G10 on a ‘Super Thursday.' ‘Super Thursday’ is so named because the Bank of England releases not only their rate announcement but also the quarterly inflation forecast from the Monetary Policy Committee. Before the announcement, GBP was trading at 11-month highs and was holding steady on hopes the Bank of England would strike an enthusiastic tone. They didn’t, and sterling fell. While the GBP did not bode well, both Gilts (UK Sovereign bonds) and the FTSE 100 rose, but for different reasons. Gilts rose on the 2017 growth forecast being cut while FTSE likely rose on the lower for longer GBP and rates making financing cheaper for longer.
At the end of the morning, the Bank of England’s Super Thursday left the policy rate unchanged while revising lower their growth and wages forecast. A pivotal point in the Carney’s speeches on Thursday was that the BoE is acting under, “the assumption of a smooth transition to a new economic relationship with the EU will be tested.” In other words, prepare for a hard-er Brexit. The clearest evidence that the market did not take this well is not just that Sterling fell across the board, but that Sterling fell despite Governor Carney saying that monetary policy tightening would be required to return inflation to target in a maintainable manner. Either way, you look at it, it would be worth watching GBP downside against the stronger currencies like EUR and AUD, and to see if the Sterling weakness will accelerate, watching GBP against the weaker currencies on a relative basis in early August like CHF, USD, and JPY.
A positive surprise in either US Non-Farm Payroll or Canadian Employment Data on Friday morning could lead to significant moves in GBP/USD or GBP/CAD. If you would like to discuss trading opportunities as the news is released, join us for our monthly DailyFX NFP Roundtable for FREE.
While EUR strength has been a prominent theme for most of 2017, the gains seen by the EUR today were mainly at the hand of weaker currencies. EUR/GBP broke above 0.9000 and traded at the highest level since early November. However, despite a day when the EUR traded little changed, the Czech central bank rose their key rate by 20bps to 0.25% in a unanimous vote as the Czech Koruna strength provided no cause for concern. While this may seem anecdotal, this helps to paint the picture that Hawkish turn in the EUR zone has support and could well continue. While this Czech central bank hike of 20bps does not mean an ECB hike is imminent, it does show that wage inflation and positive developments that lead to a gradual tightening cycle is showing up in the region.
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There are no sure things in life, save death and taxes. That continues to hold true, but the sustainability of the commodity rally is approaching closer and closer to a solid foundation that could continue. Whether you look at energy and the falling stockpiles and rising demand for Oil, Base Metals which have seen an aggressive revival in the likes of Copper, Iron Ore, or Re-bar, or you look to precious metals that benefit when Dollar weakness arrives, you can see positive developments.
Recently, a new sign of rising demand and shrinking supply arrived in the energy market. Year over Year for the first time since 2014, global supply per the Department of Energy is lower than it was last year. It’s worth noting that inventories are still nearly 100m barrels above the five-year average. The surplus to the average may mean that strong seasonal demand is playing a part in this, but it’s also encouraging that in the past three years, we have not seen such a positive supply side development, which could further boost energy and may be indicative of larger demand of other commodities.
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FX Closing Bell Top Chart: GBP/USD finds resistance at the top of channel/ Fibonacci level
Chart Created by Tyler Yell, CMT
Next Week's Main Event: USD Change in Non-farm Payrolls (JUL) | CAD Jobs Data at same time
IG Client Sentiment Highlight: EUR/GBP shorts rise by 33% WoW, a contrarian bullish signal
The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.
EURGBP: Retail trader data shows 30.6% of traders are net-long with the ratio of traders short to long at 2.26 to 1. In fact, traders have remained net-short since May 16 when EURGBP traded near 0.84972; price has moved 6.3% higher since then. The percentage of traders net-long is now its lowest since Jul 18 when EURGBP traded near 0.88594. The number of traders net-long is 17.7% lower than yesterday and 12.8% lower from last week, while the number of traders net-short is 30.0% higher than yesterday and 33.3% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURGBP prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURGBP-bullish contrarian trading bias.(Emphasis added)
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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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