Yesterday, BoE Governor Mark Carney indicated that now is not the time to raise rates. The pound tumbled as his comments probably poured cold water on speculation that BoE rate hikes may be looming, a prospect that attracted attention after 3/8 MPC members surprisingly voted for an immediate hike at last week’s BoE meeting. These remarks reinforce our view that the BoE will probably continue ‘looking through’ above-target inflation, as a potential rate hike is likely to weigh on employment and growth in a period of political uncertainty. A media story that the UK’s credit rating could soon be downgraded may have also weighed on the pound.
As for today, we expect market focus to turn back to UK politics, as the Queen’s Speech takes place. The Queen will outline to Parliament a list of laws that the government wants to get approved over the coming year. Parliament will spend the next few days debating these plans, before holding a vote next week. Importantly, the agreement between the Tories and the DUP is not finalized yet, and recent media reports suggest the deal may even fall apart. This implies that May still lacks the majority she needs to get the Speech passed and stay on as PM.
Therefore, in the short-term, any signs that May can establish a government and/or that she may soften her Brexit stance, could lead to a relief rally in sterling, in our view. We could even get some soft Brexit signals in today’s Queen’s Speech. On the other hand, if May is unable to get the Queen’s speech passed, then Labour leader Jeremy Corbyn would be invited to attempt to form a government. In this scenario, GBP could trade lower initially on the possibility of prolonged uncertainty over the timeline of the EU-UK talks. However, we think that the prospect of a Labour government or another election could result in a stronger pound overall, as the likelihood of a hard Brexit will probably diminish.
GBP/USD collapsed yesterday on Carney’s remarks, falling below the support (now turned into resistance) of 1.2700 (R2), and subsequently breaking the 1.2635 (R1) hurdle. Although the price structure on the 4-hour chart still suggests a short-term downtrend, the rate is trading slightly above the crossroad of the longer-term upside support line taken from the low of the 7th of October and the prior downside resistance line drawn from the 6th of December. Combined with the fact that yesterday’s tumble appears too steep, this makes us believe that there is the likelihood of a rebound back above 1.2635 (R1), something that may pave the way for a test near 1.2700 (R2) as a resistance this time.
RBNZ decision: Is the Kiwi too strong?
During the Asian morning Thursday, the RBNZ rate decision will be in the spotlight and the forecast is for the Bank to keep its policy steady. At its latest meeting, the Bank kept the door for further easing open, indicating that much of the recent progress in inflation was transitory. Meanwhile, policymakers noted that although growth was soft in H2 2016, the outlook remained positive. With regards to the Kiwi, they indicated that its 5% decline since February was encouraging, and that if sustained, this would help to rebalance the growth outlook.
However, ever since, developments on the latter two fronts have been quite discouraging. GDP data for Q1 showed that growth was only +0.5% qoq, far below the RBNZ’s forecast of +0.9% qoq. On top of that, the NZD recovered notably, and is now trading at levels similar to those in February, when officials had noted that ‘a decline in the exchange rate is needed’. Bearing all these in mind, we think that the Bank is likely leave the prospect for further easing on the table, and may also reintroduce its prior concerns regarding the exchange rate. In the extreme scenario, the RBNZ could even hint at FX intervention if needed to curb NZD’s strength, as it did back in November. Any such signals could reverse some of the Kiwi’s recent gains.
NZD/USD has been trading in an uptrend since the 12th of May, but in the last few days, the trend appears to be running out of steam. This is evident by the latest lower peaks in the price action and the declining momentum indicators. If indeed the RBNZ sounds more concerned tonight than it did in previous gatherings, then we may see the pair sliding below the 0.7215 (S1) support. Another break below 0.7180 (S2) would confirm a forthcoming lower low on the 4-hour chart and perhaps bring a short-term trend reversal.
As for the rest of today’s highlights:
The economic calendar today is relatively light today. From Norway we get the AKU unemployment rate for April, while in Sweden, the consumer and manufacturing confidence indices for June are due out. From the US, we get existing home sales for May and the forecast is for a slowdown.
GBP/USD
Support: 1.2600 (S1), 1.2515 (S2), 1.2480 (S3)
Resistance: 1.2635 (R1), 1.2700 (R2), 1.2755 (R3)
NZD/USD
Support: 0.7215 (S1), 0.7180 (S2), 0.7150 (S3)
Resistance: 0.7270 (R1), 0.7300 (R2), 0.7320 (R3)
