GBP/USD: Big risk for sterling bulls is dovish hike in November

By GrowthAces.com

Macroeconomic overview:

• New Bank of England Deputy Governor Dave Ramsden said today he was in no hurry to vote for an interest rate hike because he saw little sign of inflation pressure building in Britain’s labour market.
• New Bank of England rate-setter Silvana Tenreyro said she was not ready to vote to raise the BoE’s record low interest rates in November although she might do so in the coming months if inflation pressure builds in Britain’s labour market.
• The BoE surprised investors last month when it said most of its rate-setters expected to increase borrowing costs “in the coming months”, even though Britain’s economy is growing more slowly than other European economies and uncertainties about Brexit are mounting.
• But Ramsden said he was not part of the majority, which included BoE Governor Mark Carney. Financial markets have betted on a first hike as soon as November 2, at the end of the BoE’s next policy meeting.
• The BoE believes that Britain’s departure from the European Union will mean the economy will not be able to grow as quickly as before without generating excessive inflation because of lower migration and weaker investment by companies.
• Britain’s inflation rate hit 3% in September, above the BoE’s 2% target, data published today showed. The reading was in line with market expectations. Rising inflation – driven largely by the pound’s fall since last year’s vote to leave the European Union – has squeezed household incomes, causing broader economic growth to slow. Core consumer price inflation, which strips out changes in the typically volatile prices of energy, food, alcohol and tobacco, was steady at 2.7%, as expected.

Technical analysis and trading signals:

• Weak GBP/USD close on Monday and today’s short-lived reaction to UK inflation data suggests the short-term outlook  is bearish. The Monday’s low at 1.3225 is the first support level.
• We think that the downside move will be limited and the pair will probably not break below October 6 low at 1.3027 as the BoE is preparing for a hike in November. The biggest risk for sterling bulls besides an unchanged policy shock on November 2 is if the BoE delivers a “dovish hike” (the USD eased after the Fed’s “dovish hike” in March). A “dovish hike” could prompt GBP bulls to close longs established in the hope that the BoE will follow its forecast hike with another one or two more in 2018.
• We stay sideways now as in our opinion no position is justified from risk/reward perspective.

 

NZD/USD supported by inflation data, but political uncertainty still weighs on kiwi

Macroeconomic overview:

• New Zealand’s inflation rate jumped in the third quarter to overtake central bank forecasts, but was unlikely to alter the bank’s determination to keep rates on hold for years.
• The consumer price index picked up 0.5% in the three months to the end of September, after a flat reading for the previous quarter.
• The CPI grew 1.9% on an annual basis, driven by housing and food costs and beating market expectations for a 1.8% rise. The reading was also well above the 1.6% predicted in August by the Reserve Bank of New Zealand.
• The third quarter gains in price growth were led by housing related costs, with rents rising an annual 2.2%. New Zealand’s booming population, stoked by record net migration, has created strong demand for housing in the past few years, though house prices themselves have eased this year as central bank restrictions on lending took effect.
• Food bills rose 1.1% on strong global prices for soft commodities, while new government charges pushed non-tradables inflation, excluding housing, to a three year high of 2.2%.
• New Zealand’s previously robust economic growth slowed in recent quarters as skill shortages led to capacity constraints and red-hot house prices cooled.
• Added to that was intense uncertainty about the direction of the country’s next government after an inconclusive election last month left a small, nationalist party holding the balance of power. New Zealand acting Prime Minister Bill English on Monday said it could take until the end of the week to confirm the next government.
• The country has been in political limbo since September 23 when neither the National Party, which has led the government since 2008, or the Labour Party scored enough seats to form a government. National won 56 seats at the September election, meaning it would only need NZ First’s nine seats to have a majority in parliament. Labour, with 46 seats, will have to go into coalition with both the Greens and NZ First to be able to govern. The NZ First has held negotiations with both over the past week, but has kept the country guessing over which way it was leaning.

Technical analysis and trading signals:

• The NZD/USD recovered slightly in recent days, but the 7-day exponential moving average remains below 14-day ema and the bullish momentum is fading. The political uncertainty weighs on the market. We think that the NZD will rally if National Party forms a new government, but there is also a risk of stronger downside move if Labour Party, Greens and NZ First come into power.
• We stay sideways on this pair as we want to wait for a new government to be able to trade in line with macroeconomic fundamentals with political risk off the table.

 

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By GrowthAces.com – Daily Forex Trading Strategies