Today, it’s ‘Super Thursday’ in the UK. That means that besides the BoE rate decision and the meeting minutes, we will also get the quarterly Inflation Report, which Governor Carney will present at a press conference after the gathering. The BoE added a hawkish touch the last time it met, indicating that ‘some members’ would consider a reduction in stimulus should there be any further upside news on the prospects for growth or inflation. On top of that, Kristin Forbes dissented the decision to remain on hold, favoring an immediate rate hike instead. Since that gathering, data showed that the core CPI rate rose further, but GDP growth slowed significantly in Q1.
Therefore, we think that the BoE is likely to stand pat, erase the hawkish touch it added the last time, and reiterate that policy can respond in both directions. We believe that policymakers will place more emphasis on supporting economic growth, and repeat that above-target inflation entirely reflects the drop in sterling and is thus transitory. As such, although Forbes is likely to dissent again, the overall tone of the Committee may be somewhat more concerned than previously. In this case, sterling could reverse some of its latest gains. In addition, there is the prospect for the GDP forecasts to be revised lower.
GBP/USD has been trading in a consolidative manner recently, staying between the support of 1.2900 (S1) and the psychological round figure of 1.3000 (R1). A cautious committee today may be an excuse for some profit taking on existing long positions, which could cause the rate to correct lower. We believe that a dip below 1.2900 (S1) may open the way for a test near the key zone of 1.2850 (S2). Nevertheless, we still see an uptrend on the 4-hour chart and as such, we would treat such a slide as a corrective setback.
The key risk to our view for a pullback is the prospect that more than one MPC members vote for a rate hike. Something like that could indicate that there is increasing support among the Committee for such action, thereby raising speculation for a rate hike in coming meetings. In such a case, GBP/USD could surge, break above the psychological level of 1.3000 (R1), and perhaps aim for the next resistance of 1.3050 (R2).
RBNZ keeps the door for further easing open; NZD tumbles
Overnight, the RBNZ kept its policy rate unchanged, but did not communicate a more optimistic bias as many market participants may have anticipated. The statement accompanying the decision made it clear that although domestic economic data are improving, some of the progress is transitory, particularly in the inflation outlook. With regards to the Kiwi, the Bank noted that its 5% decline since February is encouraging, and if sustained will help to rebalance the growth outlook. Perhaps most importantly, policymakers kept the door for further easing wide open, indicating that numerous uncertainties remain and that policy may need to adjust accordingly. Given that this may have come as a surprise to NZD-traders, the Kiwi plunged. We think that the currency could remain under pressure for a while, perhaps until the recent concerns regarding a slowdown in Chinese growth ease a little bit.
NZD/USD traded higher heading into the meeting, to hit resistance marginally above the 0.6940 (R1) barrier just a few hours before the decision. At the time of the decision though, given the disappointing tone of the RBNZ, the pair plunged and broke below the 0.6880 (R2) level. For now, we believe that the pair may correct some of that steep fall, and perhaps test the 0.6880 (R2) territory as a resistance this time. If the bears manage to take advantage of such a corrective rebound, we would expect them to aim for another test near 0.6840 (R1), where a decisive dip may pave the way for the 0.6780 (S1) support area.
As for the rest of today’s highlights:
During the European day, Sweden’s CPI data for April are due out. The forecast is for both the headline and the underlying inflation rates to have moved higher, which could reverse some of SEK’s latest losses.
As for the UK economic data, we get the trade balance and industrial production for March, but these are likely to be overshadowed by the BoE meeting.
From the US, we get PPI data for April and initial jobless claims for the week ended on the 5th of May.
Besides BoE Governor Carney, we have three more speakers on the agenda. From the ECB, we will hear from Vice President Vitor Constancio and Executive Board member Peter Praet. In the US, comments from the influential New York Fed President William Dudley will be in focus.
GBP/USD
Support: 1.2900 (S1), 1.2850 (S2), 1.2770 (S3)
Resistance: 1.3000 (R1), 1.3050 (R2), 1.3125 (R3)
NZD/USD
Support: 0.6780 (S1), 0.6680 (S2), 0.6620 (S3)
Resistance: 0.6840 (R1), 0.6880 (R2), 0.6940 (R3)
