OANDA Market Insights podcast (episode 26)

OANDA Senior Market Analyst Craig Erlam and Head of Trading Asia Steve Innes review the week’s business and market news with Jazz FM Business Breakfast presenter Nick Howard.

This week’s big stories: rate hike from the Bank of England, Apple market cap hits $1 trillion, China moves to shore up the yuan, and US job figures (non farm payroll numbers) miss expectations.

Big revisions offset July miss on payrolls

Another strong US jobs report expected today

The PBoC giveth the PBoC taketh

GBP Dives on Dovish BoE Hike

Profit taking seen as MPC doesn’t combine hike with hawkish rhetoric

Sterling tumbled on Thursday after the Bank of England raised interest rates by 0.25% to a post-financial crisis high.

The hike, which was initially planned for May prior to the first quarter slowdown, has not come without it criticism due to the mixed data, temporary factors driving some numbers and the uncertain outlook, associated with Brexit. It was, however, almost fully priced into the markets with investors correctly drawing on the central bank’s previous views on the labour market and deafening silence as market rates rose in the run up to the meeting.

With markets pricing in more than a 90% probability of a hike prior to the meeting, it left little room for confirmation of it to have an impact. While this did come in the immediate aftermath of the hike, the lack of any apparent hawkish language alongside it or warning that more hikes will follow in the near-term appears to have triggered some profit taking on those pre-meeting positions and possibly even stops being hit after that.

BoE hike a close call

Will hike be seen as brave or stupid come March?

The result is that, despite an initial rally, the pound plummeted shortly after falling back towards 1.30 against the dollar, 145 against the yen and 1.12 against the euro (or 0.89 for EURGBP). The central bank once very keen to emphasise though that rate increases were likely to be gradual and limited, citing market expectations of three over the next three years, while also stressing the uncertain influence of Brexit, despite it assuming a smooth transition in its forecasts. All of this lacked the hawkishness that traders were obviously hoping for which aided the decline in the pound.

I think it’s clear that the BoE could have held off on the decision today until it had more certainty on Brexit – maybe even by November – and avoided the possibility that it will have to do an embarrassing u-turn in the near future. That said, it backed itself into a corner earlier this year and clearly decided it’s a risk worth taking and should negotiations take a turn for the better and the economic data improve as a result, we could look back on this as a brave and calculated move that set us on a path towards policy normalisation.

AUD/USD slides despite jump in trade surplus

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

BoE Super Thursday to live up to its name

Surely they won’t bottle it again, right?

Super Thursday promises to live up to its name one way or another this week, as the Bank of England either raises interest rates to post-financial crisis highs or risks causing unnecessary and significant market volatility.

  • Rate hike priced in but not guaranteed
  • Possible scenarios on Thursday
  • Key things to look out for

It’s been an unusual lead up to a central bank meeting, in that despite a lack of clear and specific warning signals, the likes of which we’ve become accustomed to, investors have become absolutely convinced it’s happening.

In fact, markets are now pricing in almost a 90% chance that the Monetary Policy Committee will vote to hike rates on Thursday. If the central bank doesn’t hike now, it will need a very good excuse and even then, this entire process of forward guidance will once again be heavily criticized.

BoE Interest Rate Probabilities

Source – Thomson Reuters Eikon

While it may not make much sense to blame the central bank when I’ve earlier stated that there’s been a lack of clear and specific warning signals, but policy makers are very aware of what market expectations are and when they deviate in such a significant way from reality, they do something about it. This time they have not.

This is where assumptions come into it. The lack of alternative guidance from policy makers has actually fuelled expectations that they must be planning a rate hike or they would have otherwise intervened to realign expectations.

Head fake or breakthrough ??

Remember, investors are always looking for subtle hints in order to get ahead of the curve and in this case, the central bank’s silence has been deafening. Or so investors hope. Should the MPC not deviate much from last month’s vote and hold off again, there could be a sizeable response in the markets, particularly in the pound and short-term UK debt.

Whichever way the central bank goes – and just to be clear, I think they will raise rates – there could be a very interesting response in the markets. These are some of the possible outcomes.

Dovish hike

In this scenario, it would be natural to think that this would be bullish for the pound and, in the immediate aftermath it could be. But if markets are already largely pricing this in then what exactly is left?

A rate hike that is accompanied by dovish language and cautious approach on the economy, or even wait and see approach to Brexit negotiations, could quickly trigger some profit taking by those who have anticipated such a move prior to the meeting and be bearish for the pound not long after the announcement.

EURGBP Daily Chart

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Hawkish hike

This is probably the most bullish feasible outcome for the pound. In this scenario, the BoE raises interest rates and warns that more will follow, maybe even a couple by the end of next year (more is of course possible but maybe not realistic given how the economy is right now and the uncertainty linked to Brexit).

In this case, the BoE is likely opting to look through Brexit or using base case assumptions on it – due to the sheer number of unknowns still – and base its views purely on the economic data, some of which is very good (unemployment, job openings, inflation) and some of which isn’t great (wages, investment, household debt).

GBPUSD Daily Chart

No hike

I don’t think this is likely (although it is arguably what the central bank should be doing) but it’s possible. Under this scenario, the central bank takes all of the recent data into consideration and takes the view that, given the uncertain outcome of Brexit negotiations and possibility of no deal, it makes more sense to wait until November to raise rates.

A few months is not a long time to wait but by then, they should be a lot better positioned to judge what the outcome of Brexit negotiations will be and whether it’s risky or not to be raising rates in such an environment, or what the chance is that it will be reversing course in the near-future, to its own embarrassment.

Of course, the argument against this is that there has been no noise coming from the central bank that market expectations are out of sync with their own which is usually a reliable sign that they are not.

GBPCAD Daily Chart

What to look out for

All things considered, a rate hike looks likely but there is going to be a number of elements of tomorrow’s event that will influence how markets respond.

Fed decision and US labour market in focus

The interest rate decision is the most obvious (12pm UK time) but alongside the release, we’ll get the minutes from the meeting, voting and the inflation report which contains new growth and inflation forecasts for the coming years, which will effectively determine how many hikes we’ll see.

This will then be followed by a press conference with Carney and his colleagues 30 minutes later which is never a dull event and certainly won’t be if the central bank once again bottles it.

Trade war breakthrough?

Trade war breakthrough?

US markets are off to a rousing start in the wake of a report that US and China are said to restart talks to avert the escalating tit for tat trade war but renewed selling in large-cap tech companies has tempered gains. But indeed any tempering of this confrontational issue ahead of the Presidents 200 billion trade threat will be viewed in a favourable light and provided parties remain at the table, where there’s a will there is a way.

Currency Markets

As expected there was no hawkish midsummer nightmare but rather \he BoJ did not change rates nor did they show any signs of shifting from ultra-loose monetary policy and predictably USDJPY has been grinding higher while taking the NKY is tow. The BoJ announced minuscule adjustments: Firstly, no surprise here that both GDP and CPI expectations were revised lower. Secondly, they increased the band around the 0.0% target for 10y JGBs from 10bps to 20bps, permitting more movement in rates. They changed the ETF program, maintaining purchases at JPY6.0tn but adjusting the allocation more to Topix rather than Nikkei. Finally, the BoJ adopted a forward guidance strategy as traders view incredibly subtle shift towards policy normalisation definitively dovish and topside USDJPY is now in play.

Chinese Manufacturing and non-manufacturing PMI’s were slightly below expectations but did not seem to have a notable market impact. If anything, base metals are trading mixed this morning after the data.

On the highly watched USDCNY post, the overnight the fix came out in line with expectations at 6.8165, +34 pips but on the positive trade headlines long USDCNH positions are buckling from 6.84+ to sub 6.80 as long dollar positions are running for the exits.

The AUD dollar was trading bid after residential building approvals came in better than expected overnight, But on the back of this morning move below 6.80 USDCNH has seen an exodus from arguably the market most crowded trade, short Aussie.

The National Post report overnight indicating US diffidence for Canada to join the current US/Mexico trade talks saw USDCAD spike back towards 1.31 but provided traders with an excellent opportunity to re-engage CAD longs as the outlook remains favourable for the Loonie,.And local dealers were rewarded after the positive GDP overwhelmed the negative NAFTA news.

With an apparent easing on Trade tensions, the Malaysian Ringgit should find some support on improving risk sentiment, but as we enter the two days Fed policy meeting, the USD is holding up its end of the bargain. But in addition to the Fed policy meeting, traders have payrolls on their mind which should continue to lend support to the Greenback and will limit MYR gains.

Oil Markets

Oil prices were back peddling out of the gates this morning ahead of today’s contract expirations in September Brent, after reports from Interfax pointed to increased supply, specifically from Russia, whose oil production was up to 11.22mm bpd this month. However, both Brent and WTI have reversed tack and are moving higher on the positive US-China trade headlines which are easing global growth concerns.

Gold Markets

Gold prices bounced off session lows with the Yuan rallying. However, with the Fed expected to stay the course with two interest rates rises in 2018 which should underpin near-term USD sentiment, speculators will continue to fade upticks in the absence of haven and sluggish physical demand.

GBP/USD – Pares gains ahead of BoE

The sell-off in GBPUSD (cable) has been losing momentum for a couple of months now, with the pair having stalled around 1.30 despite one attempt to break below a couple of weeks ago, something that now looks like a false breakout.

The move has coincided with a general improvement in sentiment towards the greenback, with the already hot US economy getting an additional fiscal boost from tax reforms, leading to an increase in expectations for rate hikes in the near to medium term.

GBPUSD Weekly Chart

It has also coincided with a slowdown in other countries which has forced their respective central banks to take a more gradual approach to tightening plans, with the Bank of England being one of those to have adopted such an softening in stance.

The dollar has also benefited from its renewed safe haven appeal, with US Treasuries being favoured in trade-related risk averse environments thanks in part to the higher yield that is now on offer.

DAX trading sideways as eurozone inflation within expectations

This pair is not short of potential catalysts this week, with the BoE meeting on Thursday – or Super Thursday as it has now become known – being at the very top of these (Fed rate decision Wednesday and US jobs report on Friday also clearly stand out).

The UK central bank is widely expected to raise interest rates by 25 basis points at the meeting – 87% priced in – the second post-financial crisis rate hike but the first time rates will be above 0.5% which for some time was seen as the lowest they could reasonably go.

BoE Interest Rate Probability

Source – Thomson Reuters Eikon

While the decision to raise interest rates has been met with confusion and even criticism, due to the economy very much not firing on all cylinders and Brexit talks now at a crunch point and likely to be much clearer in only a few months, policy makers have done nothing to correct markets interpretation of events which if anything makes investors even more confident that it will happen.

This comes after policy makers backtracked on a rate hike in May due to the first quarter slow down, despite being confident at the time that it was largely weather related, something recent data has gone some way to confirming.

BoJ new script supports the carry-trade

This determination to raise rates may be one of the things supporting the pound recently but if a hike is so priced in, has sterling peaked? I’m not sure. For one, any progress in Brexit negotiations should be good for the pound. The same applies to the economy, with both providing comfort to the central bank. Something it can’t have much of right now given the sheer amount of uncertainty.

GBPUSD Daily

From a purely technical perspective, the sell-off appears to have potentially run its course. The pair has found support around a notable technical support level – 50 fib from lows to highs, previous support and resistance and a big round number just to complete the hatrick.

What’s more, upon reaching here, momentum had already started to decline and has continued to do so, with the MACD and stochastic making higher lows even as price made lower ones. This divergence, while not being a buy signal, is a sign that all may not be as bearish as it was and that there may be some profit taking or even buying creaping back in (remember, if this is a corrective move, then the recent weakness should prove only temporary and bulls become increasingly interested once again).

The pair may be flat on the day after US inflation, income and spending figures brought some life back to the dollar, but should it find some upward momentum again and break back above 1.32 – and the falling channel – it could be a bullish signal in the near-term.

Busy week in markets gets off to a slow start

Investors encouraged by Trump/Juncker meeting

Equity markets are trading slightly in the red in what has been a slow start to an otherwise very busy week in financial markets.

Stock markets have been gradually rising in recent weeks, making their way back to the record high levels they achieved earlier in the year before the numerous trade conflicts involving the US heated up. The apparent progress made at the White House last week between Donald Trump and Jean-Claude Juncker has eased some concerns for now but the threats generally remain.

Earnings season has delivered a positive distraction for investors, with companies once again reporting stellar quarterly results aided by the obvious benefit of tax cuts. We’ll get results from another 144 S&P 500 companies this week as US corporates look to continue the positive momentum of earnings season so far and potentially propel the index to a new high.

DAX ticks lower, German CPI next

BoE seen raising rates while Fed and BoJ also meet

There’s also a number of central bank meetings this week, the most notable of the lot probably being the Bank of England with investors widely expecting a rate hike, taking the benchmark rate above 0.5% for the first time since early 2009. A rate hike is now 86% priced in which could trigger a lot of volatility if policy makers once again hold off, as they did back in May.

BoE Interest Rate Probability

Source – Thomson Reuters Eikon

The Federal Reserve and Bank of Japan will also hold meetings this week although these events may be less eventful, with neither seen adjusting policy this month. The Fed is also on a very clear tightening path and with the economy performing in line with expectations and the trade conflicts not yet biting, I don’t expect there to be any change in the central bank’s stance.

G7 FX moves look to central banks for direction

There has been speculation that the BoJ may look to slightly remove accommodation by increasing the yield it will allow the 10-year to reach, although I’m not sure that will come this week. Investors appear to be testing the BoJ’s resolve, with the yield having hit its highest level since February last year. Should the central bank reject the speculation, I would expect this to quickly reverse course.

This week also sees the release of the US jobs report which is widely regarded to be the most important economic report of the month and is typically a trigger for market volatility.

Economic Calendar

 

For a look at all of today’s economic events, check out our economic calendar.

OANDA Market Insights podcast (episode 25)

OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: US/EU set for tariff deal, US GDP boost, Facebook shares plummet, Brexit blow for May.

Craig also previews the week ahead with interest rate decisions coming from the Bank of England, Federal Reserve and Bank of Japan, as well as the July US jobs report.

USD/JPY – Japanese yen gains ground on strong inflation report

U.S. Economy grew 4.1% rate in Q2

Easing trade fears provide boost ahead of US GDP

OANDA Market Insights podcast (episode 24)

OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Trump attacks Fed over rate rise, UK inflation figures hit sterling, Barnier dismisses Brexit white paper , Google fined record sum.

USD Weaker After Trump Interest Rate Comments

Canada: Inflation Hit Six-Year-Plus High

Dollar Rally Ends With Trump Monetary Policy and Currency War Comments

 

BoE hike still priced in despite worrying UK data

GBP bounces back after data driven selling

European markets are trading in the red early in the session on Thursday, with the FTSE 100 the only major index in the green, supported by weakness in the pound after the release of some more disappointing data for the UK.

The UK retail sales data this morning may have dealt another major blow to the Bank of England’s hopes of raising interest rates in August, bringing an end to what has likely been a very frustrating week for policy makers. In recent weeks it has appeared that the Monetary Policy Committee had once again come around to the idea that raising interest rates in August is appropriate after plans in May were derailed by a frustratingly weak first quarter, something policy makers appeared to have correctly assumed would prove to be a temporary lull.

The data this week may have thrown another spanner in the works, with labour market figures showing a tight labour market by uninspiring wage growth, core inflation falling below 2% and now modest retail sales growth in what was expected to be a stellar month. This is clearly not the platform policy makers were hoping for when preparing investors for a rate hike but they may still seize the opportunity before it’s taken away from them for a prolonged period.

DAX takes pause from recent gains

Traders still convinced of rate hike despite week of bad releases

There may well be a strong feeling in the MPC that the central bank should have pushed ahead with a hike in May and stood by its belief that weather had a negative but temporary impact on the economy which would have given it the freedom to be patient through the rest of the year. Instead, it now finds itself in a position were the most recent data hasn’t been great and Brexit talks are not progressing as hoped, meaning it would make far more sense to hold off until November, something that would likely result in another backlash against the policy of forward guidance.

UK Interest Rate Probability

Source – Thomson Reuters Eikon

While holding off would make sense, there is clearly a view in the markets that this will not happen and the central bank may stick to plans to hike in two weeks. Despite numerous setbacks this week, a hike is still currently 68% priced in and after initial selling, the pound is showing some resilience and holding above 1.30 against the dollar. It seems traders are awaiting any hint from the BoE that plans have been put on hold again, at which point the resilience will likely break and possibly aggressively.

GBPUSD Daily Chart

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US earnings, data and Fed speakers eyed

Over in the US, futures are tracking the majority of Europe lower, with the major indices currently seen opening around a tenth of one percent lower. This comes after Federal Reserve Chair Jerome Powell once again gave an upbeat assessment of the economy on Wednesday, in his appearance in front of the House Financial Services Committee. With the Fed on a quite clear and consistent course on interest rates, there wasn’t a huge amount learned in either appearance that we already didn’t know.

‘Footy’ dented U.K retail sales and pounds sterling

Today it’s looking a little quiet for the US. There are a couple of pieces of data that traders will be looking out for ahead of the open – Philly Fed manufacturing index and jobless claims – and we’ll also hear from Powell’s colleague at the Fed, Randal Quarles. With the season now up and running, there’ll also be a big focus on US earnings with 21 companies reporting including Microsoft and BNY Mellon.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Is BoE Rate Hike in Doubt After Inflation Data?

GBP slides as core inflation falls below BoE target

Focus is back on the central banks on Wednesday as we await the second appearance this week of Federal Reserve Chair Jerome Powell and the Bank of England’s interest rate plans are questioned following some softer inflation numbers.

The pound is tumbling again on Wednesday after the latest inflation data for the UK threw a spanner in the works ahead of the BoE meeting in two weeks. There was a growing belief that the central bank will raise interest rates at the August meeting – rightly or wrongly – with the data this week seen providing additional support for such a move but the numbers we’ve seen this morning have done quite the opposite.

GBPUSD Daily Chart

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Earlier this year when policy makers were preparing a May hike, inflation was much higher and was seen as being a key reason behind the desire to raise rates. Had that number ticked higher again today, as was expected, it would – along with the other data we’ve seen recently – have provided policy makers an opportunity to follow through on previous plans without coming under too much scrutiny.

Fed Powell advances the dollar

With that not happening and core CPI falling to 1.9%, below the central bank’s 2% target, the decision becomes that much more difficult and uncertain. Moreover, the timing of the meeting is not ideal, with Brexit talks not going smoothly and only a few months in which they need to be concluded. Ordinarily, it would make much more sense for the Monetary Policy Committee to wait until November when much more clarity will exist over the economy and Brexit, but I’m not sure they will and market pricing appears to currently support this view.

UK Inflation

August rate hike still well priced in

An August rate hike is still 72% priced in, down from 77% yesterday, despite this morning’s release, which suggests investors do not believe policy makers will be deterred. The BoE’s credibility has long be brought into question, most recently in May when after months of hinting at a rate hike, it changed its mind due to first quarter weakness which it believed was transitory.

UK Interest Rate Probability

Source – Thomson Reuters Eikon

If it holds off again in two weeks despite the bounce back in the economy, people will seriously question whether any attention at all should be paid to the central banks forward guidance. For this reason, I think they will raise rates and hope they won’t be forced to reverse course in the near future, say if Brexit talks collapse.

Powell speech may offer little new information on interest rates

Attention will now turn to Powell’s testimony on the semi-annual monetary policy report in front of the House Financial Services Committee, where the Fed Chair is once again expected to deliver a very upbeat assessment of the economy and stick to previous views on rate hikes. The Fed has become one of the less interesting central banks due to its reliability and transparency – something that is very much a goal of all central banks – which is likely to make today’s appearance less of a market moving event.

USD/JPY advances to six month high post-testimony

That’s not to say that it doesn’t have the potential to cause market swings, rather that what Powell will say will likely already be priced in and so any movements are less likely to be significant. He may surprise us, should he get into a deeper discussion on trade wars for example and the implications for monetary policy, but as yet this is not something that has had an impact on the outlook.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.