The British pound rebounded yesterday, after BoE’s chief economist Andy Haldane said that he favors a partial withdrawal of the stimulus the BoE introduced in August 2016. He added that if data come in broadly as expected in the period ahead, policy tightening is likely to be needed well ahead of current market expectations. The key message we got was that he could support a rate hike at one of the upcoming policy meetings.
These comments come in contrast with Governor Carney’s remarks on Tuesday that now is not the time to raise rates. This highlights the difference in views among the MPC and suggests that the Committee may be somewhat divided. What we would like to focus on though, is the common ground between these two officials. Both noted that anemic wage growth is the biggest argument against raising rates. As such, we think that moving forward, the main determinant of whether we will see a BoE rate hike may be wage and inflation data. We believe that a material pickup in domestic inflationary pressures, particularly wages, is needed before the Bank decides to act.
EUR/GBP traded lower on Haldane’s hawkish remarks. The pair hit resistance at 0.8840 (R1) and slid to find support at 0.8775 (S1), before rebounding again. The rate continues to trade above the short-term uptrend line taken from the low of the 10th of May and thus, we consider the near-term outlook of the pair to still be positive. We expect the bulls to aim for another test near 0.8840 (R1) soon, where a break could aim for the next resistance of 0.8870 (R2). A decisive move above the latter hurdle would confirm a forthcoming higher high and perhaps open the way for the 0.8945 (R3) territory.
RBNZ stands pat, disappoints Kiwi shorts
Overnight, the RBNZ kept its policy unchanged, as was widely expected. The tone of the meeting statement was relatively optimistic on the economy, dismissing soft GDP growth in Q1 as being transitory and indicating that the growth outlook remains positive. With regards to the Kiwi dollar, the Bank noted that it has gained around 3% in trade weighted terms since May, and that a lower NZD would help rebalance the growth outlook.
What we found most striking, was how soft the Bank’s language on the currency’s strength was, given that the last time NZD was trading at similar levels, officials noted that “a decline in the exchange rate is needed”. We think market participants may have been looking for much stronger hints that the RBNZ wants a weaker Kiwi. In the absence of such signals, NZD gained on the decision. Looking ahead, we think that the outlook of the currency is neutral overall, with the next major indicator that could cause it to assume a direction being CPI data for Q2, due out in mid-July. That said, we also believe that further upside in NZD may be relatively limited, as a sustained rally could cause the RBNZ to become once again more vocal about wanting a weaker currency.
NZD/USD traded higher on the less-concerned-than-expected RBNZ. The pair rebounded after it hit support at the lower bound of the short-term triangle it has been trading within since the 6th of June. Nevertheless, the advance was stopped by the upper bound of the formation. Therefore, we would maintain our flat stance for now. That said, we still see the likelihood for the pair to turn down at some point in the not-too-distant future. We base our view on the fact that the pair has turned sideways after it hit resistance at the downside resistance line drawn from the peak of the 8th of November, while our daily momentum indicators have topped near extreme positive levels.
As for the rest of today’s highlights:
During the European day, the Norges Bank will announce its rate decision and the forecast is for no change in policy. At its latest gathering, the Bank essentially noted that the outlook had not changed much since its March assessment, when it indicated there is a slightly higher probability of a rate cut rather than a rate hike. Ever since, developments have been slightly optimistic, on balance. On the bright side, GDP and the unemployment rate were better than the NB’s own forecasts. On the downside, the core CPI rate declined by more than the Bank anticipated. Having said that though, the recent decline in NOK argues in favor of higher inflation, so the NB could incorporate into its forecasts a higher inflation path. In this case, we could get a more optimistic tone, considering that the slowdown in inflation is the only dark spot in Norway’s economic picture at the moment. Such a tone could support NOK.
As for the economic indicators, we get Eurozone’s preliminary consumer confidence index for June, and Canada’s retail sales for April. In the US, initial jobless claims for the week that ended June 16th are due out.
We have only one speaker on the agenda: Fed Board Governor Jerome Powell will testify before the Senate Banking Committee. Given that the FOMC appears to be divided in two camps too (optimistic and cautious), it will be interesting to see where Powell stands.
EUR/GBP
Support: 0.8775 (S1), 0.8715 (S2), 0.8640 (S3)
Resistance: 0.8840 (R1), 0.8870 (R2), 0.8945 (R3)
NZD/USD
Support: 0.7215 (S1), 0.7180 (S2), 0.7150 (S3)
Resistance: 0.7270 (R1), 0.7300 (R2), 0.7320 (R3)
