Sterling tumbles sharply today even though BoE upgraded growth forecasts in the quarterly Inflation Report. The central bank kept key interest rate unchanged at 0.25% and held the asset purchase target at GBP 435b, as widely expected. The central bank maintained a neutral stance and noted that "monetary policy can response, in either direction". Also, it noted that some policy makers are "closer to those limits" referring to the tolerance of overshooting the 2% inflation target. In the latest projections, BoE forecasts inflation to average 2.7% in 2017, 2.6% in 2018 and 2.4% in 2019, November forecast of 2.8% in 2017, 2.7% in 2018 and 2.5% in 2019. Growth is projected to be 2.0% in 2017, 1.6% in 2018, 1.7% in 2019, comparing to November’s forecast of 1.4% in 2017 and 1.5% in 2018, 1.6% in 2019. Sterling bulls are clearly dissatisfied with the announcement as the pound weakens notably against Euro and Yen.

On the data front, US initial jobless claims dropped 14k to 246k in the week ended January 28. Challenger job cut dropped -38.8% yoy in January. Non-farm productivity rose 1.3% in Q4 while unit labor costs rose 1.7%. UK construction PMI dropped to 52.2. in January. Eurozone PPI rose 0.7% mom, 1.6% yoy in December. Swiss retail sales dropped -3.5% yoy in December. Japan monetary base rose 22.6% yoy in January. Japan consumer confidence rose 0.1 pt to 43.2 in January. Australia trade surplus widened to AUD 3.51b in December, building approvals dropped -1.2% mom.

Dollar remains generally pressured, except versus Sterling, after yesterday’s FOMC announcement. FOMC voted unanimously to leave its policy rate within a target range of 0.50-0.75%. The outcome had been widely anticipated as the Fed just adopted rate hike of 25 bps in December. Only minor changes were seen in the accompanying statement. In short, policymakers retained the stance that future interest rate change would be ‘data dependent’. They also reiterated that economic conditions will evolve in a manner that will warrant only gradual increases in the federal fund rate’. Fed’s view on the economic outlook has not changed, with overall growth remaining ‘moderate’ and the balance of risks ‘roughly balanced’. The focus will now turn to Chair Yellen’s Congressional testimony on February 14-15. During the 1.5 week period, we would receive the employment report for January. More in Fed Upbeat About Employment, Next Rate Hike Data Dependent.

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GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2573; (P) 1.2626; (R1) 1.2710; More

GBP/USD dropped sharply after hitting 1.2705 and intraday bias is turned neutral again. Overall, rise from 1.1986 is seen as the third leg of the consolidation pattern from 1.1946. Hence, in case of another rise, we’d expect strong resistance from 1.2774 to limit upside and bring down trend resumption eventually. On the downside, firm break of 1.2411 minor support will argue that it’s completed and turn bias to the downside for 1.1946 low.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

GBP/USD 4 Hours Chart

GBP/USD Daily Chart

Economic Indicators Update

GMT Ccy Events Actual Consensus Previous Revised
23:50 JPY Monetary Base Y/Y Jan 22.60% 24.20% 23.10%
00:30 AUD Trade Balance (AUD) Dec 3.51B 2.00B 1.24B 2.04
00:30 AUD Building Approvals M/M Dec -1.20% -1.80% 7.00% 7.50%
05:00 JPY Consumer Confidence Jan 43.2 43.7 43.1
08:15 CHF Retail Sales (Real) Y/Y Dec -3.50% -0.70% 0.90% 0.80%
09:00 EUR ECB Economic Bulletin
09:30 GBP Construction PMI Jan 52.2 53.8 54.2
10:00 EUR Eurozone PPI M/M Dec 0.70% 0.50% 0.30%
10:00 EUR Eurozone PPI Y/Y Dec 1.60% 1.20% 0.10%
12:00 GBP BoE Rate Decision 0.25% 0.25% 0.25%
12:00 GBP BoE Asset Purchase Target 435B 435B 435B
12:00 GBP MPC Official Bank Rate Votes 0–0–9 0–0–9 0–0–9
12:00 GBP MPC Asset Purchase Facility Votes 0–0–9 0–0–9 0–0–9
12:00 GBP BoE Inflation Report
12:30 USD Challenger Job Cuts Y/Y Jan -38.80% 42.40%
13:30 USD Non-Farm Productivity Q4 P 1.30% 0.90% 3.10%
13:30 USD Unit Labor Costs Q4 P 1.70% 1.90% 0.70%
13:30 USD Initial Jobless Claims (JAN 28) 246K 251K 259k 260K
15:30 USD Natural Gas Storage -82B -119B

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