Sterling Rebounds as CPI Hits Four Year High, Canadian Dollar Maintains Gain

Canadian Dollar remains the strongest major currency today as boosted by comments from BoC official. Meanwhile, Sterling follows closely as lifted by stronger than expected consumer inflation data. On the other hand, the Japanese Yen trades as the weakest major currency as risk aversion recedes. Dollar follows as the second weakest as traders are getting cautious ahead of FOMC rate decision tomorrow. In other markets, Gold is suffering steep selling and is back at around 1262. WTI crude oil also stays soft in tight range around 46.

In US, the stock markets have stabilized while FOMC decision is a day away. Focus will temporarily turn to Attorney General Jeff Sessions’ public testimony before Senate intelligence committee. Sessions is expected to face sharp questions about his role in the dismissal of former FBI director James Comey and his contacts with Russia during last year’s election. In particular, he has contacted Russia Ambassador back then. Released from US, PPI rose 0.0% mom 2.4% yoy in May. Core PPI rose 0.3% mom, 2.1% yoy.

Canadian Dollar jumps on hawkish BoC comments

** Quick update (1450 GMT): Canadian dollar extends gain after BoC Governor Stephen Poloz’s comments confirmed the hawkish twist in the central bank’s stance. Poloz said a radio interview today that "interest rate cuts we put in place in 2015 have largely done their work". And "we are encouraged by the data".

Canadian Dollar jumped sharply as boosted by comments from a top BoC official that raises prospect of a rate hike. Senior Deputy Governor Carolyn Wilkins said in a speech that adjustment to lower oil prices was "largely behind us" with help of the rate cuts in 2015. And, there are "encouraging signs" of broadening growth across regions and sectors. Meanwhile, there is "significant monetary policy stimulus in the system". And, she noted that "as growth continues and, ideally, broadens further, Governing Council will be assessing whether all of the considerable monetary policy stimulus presently in place is still required." This is seen by the markets as an indication that the door for further rate cut from the current 0.50% is closed. And the next move would be a hike.

Sterling rebounds as CPI hits four year high

Sterling rebounds strongly today as headline CPI unexpectedly rose to 2.9% yoy in May, above expectation of being unchanged at 2.8% yoy. That’s highest level since June 2013. Core CPI also accelerated to 2.6% yoy, up from2.4% yoy and beat expectation of 2.3% yoy. RPI rose to 3.7% yoy versus expectation of 3.5% yoy. BoE meeting will be a major focus this week and the central bank is widely expected to keep monetary policies unchanged. Economic projections were already delivered back in May’s Inflation Report. So the vote split is the main focus in this meeting. With accelerated inflation, it’s highly likely that Kristin Forbes will dissent again and vote for a rate hike. Such expectation would provide some support to the Pound in near term. Also from UK, PPI input dropped -1.3% mom, rose 11.6% yoy. PPI output rose 0.1% mom, 3.6% yoy. PPI output core rose 0.1% mom, 2.8% yoy. House price index rose 5.6% yoy in April.

Chance of softer Brexit and cross party negotiation increases

According to a Reuters survey, 33 out of 49 economists polled this week saying that the chance of a hard Brexit reduced somewhat. Three said that such risk receded significantly. Eight said that there was no change and five said that it increased somewhat. None of the economists said that it increased significantly. It’s believed that Tories’ lost of majority in the parliament means that there is no longer any mandate for a hard Brexit for Prime Minister Theresa May. Meanwhile, public support for cross party negotiation grew after the election. A poll by YouGov showed that 51% prefer Brexit to be negotiated by a cross party team. 30% preferred it to be down by the Conservatives alone. 19% said they don’t know.

German ZEW dropped unexpectedly

German ZEW economic sentiment dropped to 18.6 in June, down from 20.6 and below expectation of 21.8. Current situation gauge, on the other hand, rose to 88.0, up from 83.9 and beat expectation of 85.0. Eurozone ZEW economic sentiment also improved to 37.7, up fro 35.1, beat expectation of 37.2. ZEW President Achim Wambach noted that the prospects for the German economy remain favourable. This is not least due to the positive GDP growth in the European Union in the first quarter of 2017. 70.8 per cent of the financial market experts expect the current situation to remain as favourable as it is at the moment, and 23.9 per cent even expect it to improve in the coming six months."

BoJ official said slower bond purchase due to falling yields

In Japan, BoJ’s executive director on monetary policy told the Parliament that the pace of bond purchases slowed since US yields have fallen. Masayoshi Amamiya said that "the slowdown came as a result of our policy of guiding yields at appropriate levels:. And BoJ will "continue to take necessary steps to stabilize prices, while keeping an eye on how they affect its financial health". BoJ will announce monetary policy decision on Friday and it’s widely expected to keep everything unchanged.

Australia business confidence dropped

Australia NAB business confidence dropped sharply by 6 points to 7 in May. Business conditions also dropped 1 point to 12. But NAB chief economist Alan Oster noted that "the business sector is looking quite upbeat, maintaining the apparent disconnect with a rather melancholy household sector." And, "it is good to see that the strength has been quite broad-based, and even at the state level we have seen some significant improvements in Western Australia, which signals that the worst of the mining sector drag is probably behind us."

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2608; (P) 1.2689; (R1) 1.2739; More…

A temporary low is in place at 1.2633 and intraday bias in GBP/USD is turned neutral for consolidation. While stronger recovery might be seen, upside should be limited below 1.2977 resistance to bring fall resumption. At this point, we’re favoring the case that consolidation pattern from 1.1946 has completed at 1.3047 already. Decisive break of 1.2614 resistance turned support would confirm our bearish view and target a test on 1.1946 low next. However, break of 1.2977 will dampen our view and turn bias back to the upside for 1.3047 and above.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. Price actions from 1.1946 medium term low are seen as a consolidation pattern, which could have completed after hitting 55 week EMA. Break of 1.1946 low will target 61.8% projection of 1.5016 to 1.1946 from 1.3047 at 1.1150 next. In case the consolidation from 1.1946 extends, outlook will stay remain bearish as long as 1.3444 resistance holds.

Economic Indicators Update