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Mid-Day Report

British Pound Sold Off after Mixed BoE Projections, Threatening Reversal

Typography

Sterling drops sharply after BoE left monetary policies unchanged as widely expected. The updated projections are mixed at best. And more importantly, they were based on the assumption of a "smooth" Brexit, which isn't clearly defined by the central bank. Markets are clearly unhappy with the announcement and the pound suffers steep selloff. Focus will now be on 1.2830 in GBP/USD and a firm break there will indicate near term reversal. On the other hand, the greenback is trying to extend this week's rebound against Euro after solid economic data including PPI and jobless claims. But momentum in Dollar is unconvincing so far. New Zealand Dollar remains the weakest one after RBNZ disappointment.

BoE delivered mixed economic projections

BoE left key interest rate unchanged at 0.25% with 7-1 vote. Kristin Forbes remained the only one voting for a hike. Meanwhile, Charlotte Hogg did not participate. Asset purchase target was held at GBP 435b by 8-0 vote. In the quarterly Inflation Report, UK growth is projected to be at 1.9% in 2017, revised down from prior 2.0%. Growth projections for 2018 and 2019 were revised up, to 1.7% and 1.8% respectively, from 1.6% and 1.7%.

For inflation, BoE raised 2017 CPI projections to 2.7%, up from prior 2.4%. However, for 2018 and 2019, inflation is projected to be 2.6% and 2.2%, down from prior 2.8% and 2.5%. It also noted that "through its effects on costs, the fall in sterling is likely to keep inflation above the 2% target throughout the next three years."

The central bank also noted that "if the economy follows a path broadly consistent with the May central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the very gently rising path implied by the market yield curve underlying the May projections." However, BoE also emphasize that "this is conditioned on the assumptions that the adjustment to the United Kingdom's new relationship with the European Union is smooth, and that Bank Rate follows the market-implied path for interest rates."

Released from UK, industrial production dropped -0.5% mom, rose 1.4% yoy in March. Manufacturing production dropped -0.5% mom, rose 2.3% yoy in March. Construction output dropped -0.7% mom in March. Visible trade deficit widened to GBP -13.4b in March. RISC house price balance was unchanged at 22 in April.

US continuing claims dropped to 28 year low

Initial jobless claims dropped -2k to 236k in the week ended May 6, below expectation of 245k. Initial claims now stayed below 300k threshold for 114 straight weeks. Continuing claims dropped -61k to 1.91m in the week ended April 29. That's the lowest level since November 1988. PPI rose 0.5% mom, 2.5% yoy in April, above expectation of 0.2% mom, 2.2% yoy. Core PPI rose 0.4% mom, 1.9% yoy, above expectation of 0.2% mom, 1.7% yoy.

New York Fed Dudley: Protectionism is a dead end

New York Fed President William Dudley said that "protectionism can have a siren-like appeal". And, "viewed narrowly, it may be potentially rewarding to particular segments of the economy in the short term." But he warned that "viewed more broadly, it would almost certainly be destructive to the economy overall in the long term." He further said that "there are many approaches to dealing with the costs of globalization, but protectionism is a dead end." Also, "trying to achieve a high standard of living by following a policy of economic isolationism will fail." Nonetheless, Dudley didn't mention US President Donald Trump and administration in his speech.

Boston Fed Rosegren: Three more hikes this year

Yesterday, Boston Fed President Eric Rosengren mapped out a more hawkish policy path for Fed this year. He noted that Fed should hike three more times this year. In parallel, Fed should also start shrinking the balance sheet. That is, he doesn't advocate a "brief pause". Rosengren said that "along with a gradual reduction in the level of the balance sheet, it would still be reasonable to have three rate increases over the remainder of this year." And "I do not regard the weakness in first quarter data as a harbinger of softness in the underlying economy, and the strength of the labor market report on Friday provides some strong confirmation of that view."

Kiwi tumbled after RBNZ

RBNZ left the OCR unchanged at 1.75% in May. Policymakers shrugged off the recent NZD depreciation and the rise in inflation, indicating that the monetary policy would likely stay unchanged for the rest of the year and probably until 2020 before tightening. The market was disappointed by the lack of hawkish comments and the unchanged forward guidance. Down -1.85, NZDUSD slumped to an 11-month low of 0.6816 after the announcement. More in

ECB Draghi: Too early to declare success

ECB President Mario Draghi said at a Dutch Parliament hearing yesterday that "the economic recovery has evolved from being fragile and uneven into a firming, broad-based upswing. However, he emphasized that "it is too early declare success". Draghi said that incoming data "confirm that cyclical recovery of the euro area economy is becoming increasing solid and that downside risks have further diminished. But, "underlying inflation pressures continue to remain subdued and have yet to show a convincing upward trend." And, the "time to exit or to time to think about exit or not" hasn't come yet. Draghi said "this will happen when inflation" is durable, "self-sustained, and it's for the whole of the euro area."

Also from Europe, Germany WPI rose 0.3% mom in April. Swiss CPI rose 0.2% mom, 0.7% yoy in April.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2913; (P) 1.2950; (R1) 1.2974; More...

GBP/USD drops sharply today but stays above 1.2830 minor support so far. Intraday bias is neutral first. Another rise cannot be ruled out, but upside momentum is clearly weak with bearish divergence condition in 4 hour MACD. Also, current rally is seen as part of the corrective pattern from 1.1946. Hence, even in case of another rally, we'll look for reverse signal above 1.2987. Meanwhile, break of 1.2830 support will indicate short term topping. In such case, intraday bias will be turned back to the downside for 1.2614 support.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term reversal yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

GBP/USD 4 Hours Chart

GBP/USD Daily Chart

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
21:00 NZD RBNZ Rate Decision 1.75% 1.75% 1.75%
23:01 GBP RICS House Price Balance Apr 22% 20% 22%
05:00 JPY Eco Watchers Survey Current Apr 48.1 47.8 47.4
06:00 EUR German Wholesale Price Index M/M Apr 0.30% 0.10% 0.00%
07:15 CHF CPI M/M Apr 0.20% 0.20% 0.20%
07:15 CHF CPI Y/Y Apr 0.70% 0.50% 0.60%
08:00 EUR ECB Economic Bulletin
08:30 GBP Industrial Production M/M Mar -0.50% -0.40% -0.70% -0.80%
08:30 GBP Industrial Production Y/Y Mar 1.40% 1.90% 2.80% 2.50%
08:30 GBP Manufacturing Production M/M Mar -0.60% -0.20% -0.10% -0.30%
08:30 GBP Manufacturing Production Y/Y Mar 2.30% 3.00% 3.30% 3.00%
08:30 GBP Construction Output M/M Mar -0.70% 0.30% -1.70%
08:30 GBP Visible Trade Balance (GBP) Mar -13.4B -11.6B -12.5B -11.4B
09:00 EUR European Commission Economic Forecasts
11:00 GBP BoE Rate Decision 0.25% 0.25% 0.25%
11:00 GBP BoE Asset Purchase Target May 435B 435B 435B
11:00 GBP MPC Official Bank Rate Votes 1--0--7 1--0--8 1--0--8
11:00 GBP MPC Asset Purchase Facility Votes 0--0--8 0--0--9 0--0--9
11:00 GBP BoE Inflation Report
12:00 GBP NIESR GDP Estimate Apr 0.20% 0.40% 0.50%
12:30 CAD New Housing Price Index M/M Mar 0.20% 0.30% 0.40%
12:30 USD PPI M/M Apr 0.50% 0.20% -0.10%
12:30 USD PPI Y/Y Apr 2.50% 2.20% 2.30%
12:30 USD PPI Core M/M Apr 0.40% 0.20% 0.00%
12:30 USD PPI Core Y/Y Apr 1.90% 1.70% 1.60%
12:30 USD Initial Jobless Claims (MAY 06) 236K 245K 238K
14:30 USD Natural Gas Storage 67B