GBP/USD: Profit Taken On GBP/USD Long After Optimistic Message From BoE

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GBP/USD: Profit Taken On GBP/USD Long After Optimistic Message From BoE

• The Bank of England said its rate-setters felt the threat to the world economy from China’s stock-market slump did not signal a slowdown for Britain. Policymakers voted 8-1 to keep rates unchanged, as expected.
• The discussion in the minutes was dominated by the recent news out of China and other emerging markets. The MPC concluded that while downside risks to global growth had “probably increased”, it was simply too early to know whether and how this would impact UK economic activity. The Committee said private domestic demand had remained strong and there were signs that core inflation may be firming. The minutes said that BoE staff have slightly lowered their estimate of third-quarter GDP growth (previously 0.7% qoq), reflecting the surprise fall in the services PMI for August.
• The MPC is balancing a relatively robust recovery with inflation that is far below target due to past oil price falls and subdued wage pressure. But a minority of policymakers saw a danger that near-zero inflation could rise faster than forecast and exceed its 2% target in a couple of years, suggesting they would not take much more persuading to back a rate hike. For one policymaker, Ian McCafferty, this risk was already big enough that he voted for a second month in a row for an immediate rate rise to 0.75%, arguing it would help ensure rates rise only gradually.
• The GBP/USD jumped to a two-week high after the rate decision and the publication of the minutes of the Monetary Policy Committee meeting. The market expected dovish statement from the BoE, so slightly more hawkish comments resulted in much higher GBP/USD levels, as we expected. We took profit on our GBP/USD long position (1.5240-1.5440).
• Today’s data showed that British construction output unexpectedly dipped in July on the month, reversing a bounce seen in June, after the biggest annual fall in house-building in more than two years. Construction output fell by 1.0% mom vs. market consensus of a 0.5% rise after an unrevised 0.9% gain in June.
• Construction makes up 6% of Britain’s economy, but the data is volatile, especially on a monthly basis, and can contribute to significant revisions to overall GDP. However, the Office for National Statistics did not revise the 0.2% growth rate it recorded for the sector in the second quarter.
• The GBP bulls are now looking for a reason to continue a recovery in the GBP/USD and will be focused on next-week Fed meeting. We expect no rate hike at the upcoming FOMC meeting, but look for the statement and Janet Yellen’s press conference to send a stronger signal for an upcoming move at one of the next two meetings. Fed funds futures showed investors placed a 28% likelihood of a Fed move this month. The USD may weaken in an initial reaction to an on-hold decision, but the volatility will be high. Hawkish comments from the Fed may even result in shifting market expectations from December to October and stronger USD at the end of next week.
• There would be also some attention to the impact on sterling of the election, due on Saturday, of a new leader of Britain’s main opposition Labour Party, likely to be from its left wing.

Significant technical analysis’ levels:

Resistance: 1.5476 (high Sep 10), 1.5492 (50% of 1.5820-1.5164), 1.5508 (high Aug 27)

Support: 1.5339 (low Sep 10), 1.5329 (10-dma), 1.5270 (low Sep 8)

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