GBP/JPY – Bearish Breakout Ahead of Jobs Data and BoE

OANDA Senior Market Analyst Craig Erlam talks to Core Finance about the recent bearish break in GBPJPY and whether it signals more pain ahead. He also previews the UK jobs data and Bank of England inflation report hearing and what they could mean for interest rates this year.

USD/JPY – Japanese Yen Edges Lower as Japanese Manufacturing PMI Dips

BoE Hearing and Fed Minutes in Focus

DAX Under Pressure, Investors Eye Fed Minutes

BoE Hearing and Fed Minutes in Focus

US Futures Continue to Pare Last Week’s Gains

US equity markets are expected to open in the red again on Wednesday, tracking losses in Europe as stocks continue to pare last week’s strong rebound.

It’s been a relatively quiet start to the morning and the week, with the bank holiday in the US and Canada contributing to this. The European session has been dominated by economic data releases so far and that’s likely to continue, with flash manufacturing and services data due from the US shortly after the open. It’s the FOMC minutes that will be released later in the day though that will likely be the standout event from a US perspective, particularly as the statement caused quite a stir at the end of January.

US Yield Curve Now (Orange) and on 29 January 2018 (Purple)

Source – Thomson Reuters Eikon

The sell-off in the markets may have come a couple of days later but part of the initial trigger was a more hawkish sounding Fed, with the jobs report then being the straw that broke the camel’s back two days later. While the minutes may not generate quite the same response, traders will likely monitor what they say very closely for signs that policy makers are now leaning more towards three to four rate hikes this year, rather than two or three.

EUR/USD – Euro Ticks Lower as German Manufacturing PMI Softens

GBP Slips as Unemployment Ticks Higher

Sterling is coming under a bit of pressure this morning after UK jobs data for the three months to December showed wages still growing at a moderate pace and unemployment ticking up to 4.4%. While a higher reading on wage growth may have triggered a more bullish response from the pound, the data turned out to be quite insignificant as it’s unlikely to change the views at the Bank of England.

UK Unemployment Rate

Wages have been slowly ticking higher recently and they could continue to do so as workers demand more due to the higher cost of living and a tight labour market. The move higher in the unemployment rate won’t be a concern at this moment with it potentially being a one-off move and still very low. As long as inflation remains at upper range of what is deemed acceptable, the central bank seems intent on raising rates at least once more this year, despite the temporary factors driving it and economic uncertainty that lies ahead.

Yield-o-Mania

BoE Inflation Report Hearing Eyed as Markets Price in Rate Hikes

Members of the Monetary Policy Committee including Governor Mark Carney will appear before the Treasury Select Committee later on today, during which they will be questioned on their latest inflation report forecasts and expectations for interest rates going forward. While it’s always interesting to get the views of policy makers and the pound will likely be volatile throughout, I wonder how much of what they have to say will now already be priced in, with at least one rate hike now expected this year.

GBPUSD Daily Chart

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With that in mind and with Brexit transition negotiations likely to dominate the next month, we could see the pound lose some of the momentum that’s been gathering over the last six months or so. It’s recent failed to make new highs on two occasions against the dollar and it’s also slipping against the yen in a possible sign that traders are beginning to lock in profits ahead of what could be a difficult month.

Economic Calendar

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

FX Market Analysis – 20 February 2018 (Video)

Senior Market Analyst Craig Erlam discusses this week’s key event risks, with the most notable being the UK jobs report and BoE inflation report hearing.

Craig also gives his live analysis on EURUSD (11:04), GBPUSD (15:13), EURGBP (17:04), AUDUSD (18:36), USDCAD (20:02), GBPCAD (22:01), NZDUSD (24:47), USDJPY (25:44), GBPJPY (26:47) and EURJPY (28:24).

USD/JPY – Dollar Punches Above 107 Yen, Fed Minutes Ahead

Higher Yields Pushing Dollar Up

Intermezzo

Calm Returns to Markets Ahead of BoE Event

US Futures Flat After Uneventful Session in Europe

A sense of calm appears to be gradually returning to financial markets as we near the end of the week, with indices in Europe trading a little lower and US futures flat after ending Wednesday’s session in a similar manner.

While volatility in the markets has eased over the last couple of days, it has remained at very high levels which is probably a sign of the ongoing nervousness among investors which may leave markets vulnerable to further declines. Still, the European session has so far been relatively uneventful compared to the last few days which may be a positive sign ahead of the open in the US.

The sell-off on Monday was widely attributed to rising yields on the back of higher interest rate expectations in the US and Europe, although it was likely exacerbated by a combination of other factors, such as automated trading and fear of a broader correction given how long it had been since the last. It’s interesting then that while yields fell after the stock market sell-off, they have been creeping higher again and now find themselves not far from the levels they were at on Monday. Should we avoid another plunge in stocks, it would suggest that yields may have been the catalyst but ultimately, the selling that followed was driven by other factors, perhaps including a belief that a correction was overdue.

Are BoE Interest Rate Expectations Too Bullish?

Will Carney Adopt Cautious Approach Given Market Volatility?

It will be very interesting to see what approach the Bank of England takes when it holds its quarterly press conference later on, given the recent market volatility. Central banks typically approach these events with incredible caution due to the ability of a seemingly harmless comment to cause excessive swings as traders pick apart everything that’s said.

Governor Mark Carney may have to be extra careful today then, particularly if the BoE is planning to lay the foundation for a rate hike this year, with an increasing number of people suggesting one will come in May. I remain unconvinced by this given the amount of economic uncertainty, soft economic data and the fact that inflation is believed to have peaked. Should the new forecasts contain an upgrade to the inflation outlook then perhaps this will nudge policy makers towards raising interest rates again.

GBPUSD Daily Chart

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With no change in interest rates expected, traders will be paying very close attention to the new forecasts, as well as the press conference with Carney and his colleagues. If the BoE is considering a hike in May, you would expect it to start laying the groundwork for it today and at the meeting in March, which could provide additional upside pressure in UK debt and sterling, which is already trading at pre-referendum levels against the dollar.

Market Jitters Remain

Crypto Rebound May Be Short-Lived

The rebound in bitcoin is continuing today, with the cryptocurrency now up more than 40% from the lows posted two days ago. In any other asset other than cryptocurrencies, this kind of move would be staggering but instead this is just another day for bitcoin. It is also only a small rebound compared to the declines it’s seen over the last couple of months and may prove to be yet another dead cat bounce, albeit one that exceeds 40%.

Bitcoin Daily Chart

Source – Thomson Reuters Eikon

I’m not convinced yet that any rebound will be sustained as we continue to see a steady stream of negative news flow which has severely damaged sentiment in cryptocurrencies. The rally towards the end of last year was driven by the buzz and positive sentiment towards bitcoin and its peers – as well as a large speculative push from FOMO traders – and the reversal of this has equally weighed heavily on it. If that continues, I see no reason why it won’t be back below $6,000 in the not too distant future.

Economic Calendar

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

Are BoE Interest Rate Expectations Too Bullish?

BoE to Release New Economic Forecasts Alongside Rate Decision

The Bank of England holds its first monetary policy meeting of the year this week, after which it will release the quarterly inflation report alongside its monetary policy decision and hold a press conference with Governor Mark Carney.

The event – which is often referred to as “Super Thursday” – is one of the most hotly anticipated of the UK calendar as it offers significant insight into the thoughts of the Monetary Policy Committee, something that’s become increasingly sought after since it started raising interest rates in November.

BoE policy makers took the decision to raise interest rates after inflation surpassed 3% in November, a level deemed by many to be too high despite being driven by one-off currency moves in the aftermath of Brexit. This is led many economists to forecast another hike this year and two more over the three forecasting period, but have they and others been misled by the central bank?

GBP/USD – Pound Under Pressure, BoE Rate Decision Next

In many ways, the dilemma facing the BoE is no different than that facing other central banks – the economy is growing, unemployment is very low, labour market slack appears low and yet inflation is stubbornly low – but one very important difference exists, Brexit.

The sheer amount of uncertainty that exists because of Brexit has resulted in low growth compared to its peers and its pre-referendum levels, businesses are reluctant to invest and the consumer squeeze is taking its toll. The economy may well have shown more resilience than many feared prior to the referendum but is this really the kind of environment that the central bank should be raising rates in? If not, why did they raise by 25 basis points in November?

The central bank will naturally point to the above target inflation as warranting a hike which would be fair, assuming they believed it would remain at those levels of exceed it, which is debatable. This would also indicate a willingness to raise more if inflation remains well above target. While it’s likely to have peaked, it’s not expected to fall very far for a while which is why people may be anticipating further hikes.

Another possibility could be that they wanted to reverse the emergency post-Brexit rate cut which many Brexiteers criticized at the time and some others have questioned the need for since. Especially when you consider that the central bank was reluctant to move below 0.5% throughout the aftermath of the global financial crisis and eurozone debt crisis. If lower rates were seen as risky or unnecessary then, can they possibly be warranted now? If not and this was behind November’s decision, are the markets wrong in anticipating another hike this year and more after?

Gold Slides to 4-Week Low as Stock Markets Settles Down

This could become a lot clearer in the coming meetings and Thursday should offer some early insight, particularly as the inflation report includes growth and inflation forecasts. Any indication that policy makers are in no rush to raise again could see markets pare back expectations resulting in lower yields on UK debt which could in turn weigh on the pound. We may not get this on Thursday though, assuming we do at all, as they may opt to gradually soften their stance over a number of meetings, particularly if Brexit negotiations aren’t progressing as planned. Ultimately, these will have a major bearing on how interest rates move over the three year forecast period.

GBPUSD Daily Chart

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The FTSE 100 may also be sensitive to the BoE event on Thursday, given its inverse relationship with the pound. A stronger pound has typically weighed on the index due to the external exposure of the companies that make up the index, while a weaker pound has been positive for it, as seen in the aftermath of the referendum. It’s been a rough couple of weeks for the FTSE, the last couple of days in particular as volatility has returned in force and equities have been sent into a tailspin lower. A strengthening pound – should the BoE release bullish forecasts and adopt a hawkish tone – may not help matters.

FTSE and GBP Trade Weighted Index Correlation

Source – Thomson Reuters Eikon

Weekly FX Market Update – 6 February 2018 (Video)

It’s been an extremely turbulent 24 hours in the financial market with the Dow recording its largest ever daily points drop as panic set in and traders tried to work out what was triggering such a strong sell-off. Markets have stabilized a little on Tuesday but there remains some concern among traders which continues to weigh.

Senior Market Analyst Craig Erlam talks about what he thinks has triggered such a move and goes through this week’s other key events in the markets.

He also gives his live analysis on EURUSD (18:08), GBPUSD (20:02), EURGBP (22:12), AUDUSD (23:32), USDCAD (25:10), GBPCAD (27:16), NZDUSD (28:54), USDJPY (30:58), GBPJPY (32:53) and EURJPY (34:12).

DAX Recovers After Falling to 5-Month Low

Beware: FX Space is Calm, But Appearances Can Be Deceiving

Plop Plop Fizz Fizz Oh What a Relief it is

US Futures Add to Friday’s Losses

Wall Street Poised For Sharp Losses Again on Monday

US futures are trading back in the red again on Monday, adding to substantial declines seen on Friday when higher interest rate and inflation expectations weighed heavily on stocks.

We’ve seen a sharp increase in US bond yields over the last week after the Federal Reserve released a more hawkish than expected statement – alongside its monetary policy decision – and the jobs data reported a significant increase in earnings. Markets now have three rate hikes this year more than 50% priced in and some people are even anticipating a fourth, which is unusually ahead of current Fed forecasts.

While Friday’s declines were larger than we’ve become accustomed to and the biggest drop in the Dow since June 2016, I don’t think it yet signals that a large correction is underway. Small corrections are normal in markets, even if we haven’t experienced them as often in recent years. Asian and European markets have suffered significant losses this morning in response to the US declines on Friday but we’ll have to see over the coming days whether this will trigger more downside.

Dow 30 Daily Chart

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Equities Slump Deepens; Dollar Steady

Bitcoin Testing $7,600 Lows Again

Bitcoin on other hand is struggling yet again at the start of the week and is trading back below $8,000 at the time of writing. Cryptocurrencies have seriously fallen out of favour since the middle of December and constant negative news flow and speculation of increased regulation has exacerbated the move lower, much in the same way that the constant flow of positive news stories aided the explosion higher.

Bitcoin (CME) Daily Chart

Source – Thomson Reuters Eikon

In much the same way that picking the high on the way up proved to be extremely difficult, it’s tough to establish a realistic low for bitcoin and others. It would appear cryptos can’t rely on the speculators to drive prices higher again as its likely they’ve been severely burned over the last couple of months and may be reluctant to jump back in.

BoE “Super Thursday” Eyed This Week

This week will be a little quieter than the one just gone, although there are a few central bank meetings that traders will be keen on. The Bank of England meeting stands out, with it being accompanied by the quarterly inflation report and press conference with Governor Mark Carney. The central bank raised interest rates last year and many people expect another in 2018. With the economic outlook so uncertain though and inflation probably having peaked, I question whether another rate hike is as nailed on as some would suggest.

DAX Drops to 17-Week Low, Eurozone Retail Sales Slide

Economic Calendar

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

OANDA Weekly Podcast

 

A look back at the Business week with Jonny Hart from the Jazz FM Business Breakfast and OANDA Senior Market Analyst Craig Erlam. Talking points include Craig’s “moment of the week”,  US jobs and interest rates, bitcoin and Capita. Jonny and Craig also preview next week’s Bank of England monetary policy decision, otherwise known as “Super Thursday”.

Dollar Rebounds After Strong Jobs Report

By the numbers: U.S January NFP fallout

US Yields Near Four Year High Ahead of Jobs Data