We welcome in another week with focus towards another major central bank meeting and next in line is the BOE. The pound has firmed up through much of the second half of the year as rising inflation and some hawkish soundings from the BOE and Mark Carney has seen markets begin to price in a rate hike. Markets are expecting rates to rise from .3% to .5% and the pound remains firm to welcome in the week however with a rate hike already priced in to the pound the market may well favour selling GBP, especially should the BOE indicate inflation has topped out and rate hike will be on hold going forward, while QE will likely continue as is.
It was the opposite for the euro last week, where markets were disappointed having priced in a sooner return to tightening than the ECB guided last week. In effect the ECB have left their easing program open needed and for the euro that meant selling which continued through Thursday and Friday. We mentioned that we had seen the single currency break several key technical areas and if the euro failed to recover its footing this week further downside will be expected.
The USD had one of its best weeks of the year with the USD index up over 1% onto the close on Friday, helped by a better than expected Q3 GDP from the US which saw annualised growth at 3% vs 2.6% with consumption rising to 2.4%. The BOE are not the only central bank meeting this week, the FOMC will deliver their rate decision on Wednesday however no change is expected, while it is a similar case in Japan where the BOJ meet tomorrow and with no change expected there, JPY is due to remain under pressure.
GBP will likely find itself in consolidation for much of the week ahead of the BOE meeting on Thursday. We expect to see the BOE raise interest rates by 25bps however as mention this is more or less fully priced into the value of GBP and what Mark Carney guides after that will set the real direction for GBP. The Inflation Report will also be released at that time and this is where things could get interesting. Any suggestion that inflation has been seen as peaking at 3% will remove the likelihood of any additional rate hikes from the BOE and as such put additional downside pressure on the pound.
There is little in the way of major data from the UK today so sterling pairs will be focused on recent ranges again. EURGBP broke back below .8850 on Friday afternoon and that in turn drove the pair back to .8826. Real support in this pair lines up between .8725/50 area and unless that gives EURGBP can find the scope to move higher but additional downside is favored for now. Any rallies this week will find resistance towards .8855, but as long as we sit below .8907 the downtrend remains. GBPUSD continues to hold its larger range, 1.3000 to 1.3025 provides support with rallies higher falling short of 1.3300 as sellers emerge thus providing some resistance around that area.
There is some low level Eurozone data in the form of confidence data due this morning but not much to get too excited about to be honest and given the bigger picture in place from last week, even a pick-up in sentiment is unlikely to see a shift in the ECB so soon. This might leave the euro defending itself from moves in other currencies and we’ll be looking towards the US this afternoon to see how EURUSD fairs.
PCE data is due for release and this is the Fed’s favoured measure of inflation, which is due to show prices rose at a rate of .1% through Q3, or annualised at 1.3% (unchanged from previous). While this is still some way below the Fed’s 2% target, any sign of a pickup will favour the USD especially following on from last week’s firm GDP print. Markets will also be looking for progress on Trump’s tax plan and some details on his picks for the new Fed Chair with Janet Yellen now apparently out of the running. Trump has favoured a weaker USD so his new choice as a Fed Chair may result in some USD downside risk.
EURUSD has made a strong technical break lower and while last week’s lows at 1.1575 now provide some light support, we’ll be looking for progress back towards 1.1425/35 area. 1.1680 provides some near term resistance to moves higher while 1.1790 marks downtrend resistance.