There’s plenty going on across the world and while tensions remain high over the Iranian nuclear deal, with additional incursions with Israel overnight, markets seem to be relatively unphased. The USD index traded more or less flat on the day, we did see the greenback press to fresh 5 month highs yesterday morning but it gradually gave back that ground through the day, at one point even facing losses. The euro was slightly weaker on the day, EURUSD dropping to levels not seen since December 22nd, while EURSEK was also a notable mover, down 1.5% on the day yesterday and over 3.5% in less than a week. GBP was fairly neutral on the day against the USD, and advanced slightly again versus the weaker euro. The big event for the pound however comes in the form of today’s BOE.
The about face in market expectations for rate hikes from the BOE in the last month has resulted in GBPUSD dropping over 6%. That’s a huge move over the course of less than a month by any standards but it was the notable slowdown in growth throughout March and a considerable drop in inflation, along with some improving wage growth that really caused the turn. The BOE’s sole purpose for raising rates was only ever going to be to tackle inflation. The economy is growing slower than any of its G7 rivals, Brexit remains just around the corner, house price growth is slowing, as is development and the country is living on record levels of household debt. Raising interest rates in this environment would sound foolhardy to most but with inflation at 3% the BOE were stuck between a rock and a hard place. Inflation however has improved, dropping back towards to BOE’s 2% target (currently 2.3%) from its lofty highs above 3% earlier in the year. We still expect to see inflation hold above the BOE’s target and it may even creep back given the pounds recent sell off.
Today will be all about the vote and to see if Carney and Co leave the door open to further rate hikes later in the year should data improve. Markets expect a 7-2 vote, in line with the last vote and should that be the case, GBP will likely find some cause to rally. A unanimous vote to keep rates on hold will almost certainly drive additional GBP selling. Then it’s down to Carney, he’s been trying to play a balancing act between expectations and actual policy guidance and thus far has failed miserably. The “unreliable boyfriend” as he’s been named will have another chance to show his metal but thus far this morning we’ve seen GBP weakness. Before the BOE, we have trade balance data, industrial and manufacturing production and the NIESR GDP estimate. A very busy day for the pound. EURGBP range highs towards .8850 and .8680 likely holding any moves lower, while only a break above the .8850 area will break the downward momentum in EURGBP that has been in place since last August. GBPUSD has already broken well below its rising trend in place from early 2017, currently we find ourselves basing out just around 1.3500 area, a break below there should see a move to 1.3315 quite quickly.
The ECB economic bulletin fits somewhere in the middle of all this morning’s madness but doesn’t carry too much weight to shift ECB expectations and EURUSD will likely favour looking towards US CPI and hourly earnings data due for release this afternoon. We marked 1.1800 area last week as a stopping point for EURUSD’s decline, 1.1822 was yesterday low before a slight rebound. 1.2000 are will be the next major resistance to moves higher but EURUSD still feels like it has more to drop, with USD demand increasing as the market favours buying the dips in the greenback s value.