The Bank of England kept its policy unchanged yesterday, as was widely anticipated. However, policymakers delivered a ‘hawkish’ twist, as the vote to remain on hold was 5-3, much tighter than the forecast of 7-1. MPC members McCafferty and Saunders joined Forbes in calling for a rate hike, sending the message that a potential tightening move may be closer than markets previously expected. The result was a stronger pound.
EUR/GBP slid following the surprise in the BoE’s votes. The pair fell below the support (now turned into resistance) zone of 0.8775 (R1) to stop slightly above the 0.8700 (S1) line. A dip below that hurdle may extend the tumble towards the 0.8640 (S2) territory. Nevertheless, given that the price structure still suggests an uptrend, we would treat such a setback as a corrective phase before the bulls decide to take the reins again.
The minutes showed that these dissents are probably owed to the higher inflation prints recently. Policymakers noted that inflation could exceed 3% by the autumn, suggesting the inflation overshoot could be more pronounced than previously thought, which reduces their tolerance of above-target inflation.
Despite the tighter vote, we do not expect the BoE to actually hike rates anytime soon. This was Forbes’s last meeting as an MPC member, implying the hawkish camp in the BoE is likely to get smaller, unless her replacement is someone with very similar views. What’s more, above-target inflation is temporary as the BoE reminds us of in every Inflation Report recently, and the ‘overshoot entirely reflects the effects of the falls in sterling’. It would be strange to raise rates in order to combat ‘temporary’ effects, especially since a hike could weigh on employment and growth, in a period of elevated political uncertainty.
Moving forward, we think that GBP traders will quickly turn their attention back to developments in the political spectrum. Specifically, we think that next week, market focus will be on the Queen’s speech on Wednesday and subsequently, on when the Brexit negotiations will commence.
Bank of Japan keeps its stimulus program unchanged
The BoJ kept its QQE with yield-curve control framework unchanged today, via a 7-2 vote. The meeting statement contained no surprises, with the most noteworthy point being that policymakers are now more optimistic on private consumption. Importantly, the Bank provided absolutely no signals regarding a QE-exit plan, as has been suggested by some media reports recently.
In fact, as long as inflation remains stuck near 0%, we don’t expect any such announcement from the BoJ. Even though policymakers could provide a plan on how QQE with yield-curve control may eventually be removed, we think any such plan will be accompanied by strong signals that this is not going to happen anytime soon. As for the yen, given that longer-term JGB yields remain capped near 0% by the BoJ, we continue to expect the movement in yen crosses to be decided primarily by its counterparts and not so much by JPY. The exception to that would be periods when risk sentiment dominates market moves, as JPY is considered a safe haven asset.
USD/JPY surged yesterday, breaking above the crossroad of the 110.30 (S2) barrier and the downtrend line taken from the peak of the 10th of May. Then the pair emerged above the 110.80 (S1) zone to stop near 111.25 (R1). In our view, yesterday’s rally has turned the short-term outlook to positive and as such, we expect a move above 111.25 (R1) to open the way for our next resistance of 111.70 (R2). Nevertheless, we would stay mindful of a corrective setback for now, given that the latest rally appears overextended.
Today’s highlights:
During the European day, we have a relatively quiet calendar day. From Eurozone, we get the final CPI for May, but as the final figure is expected to confirm the preliminary estimate, the reaction in EUR is likely to be limited.
From the US, we get building permits and housing starts, both for May. These figures are expected to have risen somewhat. We also get the nation’s preliminary U of M consumer sentiment index for June, which is expected to have remained unchanged.
We have only one speaker one the agenda: Dallas Fed President Robert Kaplan.
EUR/GBP
Support: 0.8700 (S1), 0.8640 (S2), 0.8600 (S3)
Resistance: 0.8775 (R1), 0.8830 (R2), 0.8870 (R3)
USD/JPY
Support: 110.80 (S1), 110.30 (S2), 109.85 (S3)
Resistance: 111.25 (R1), 111.70 (R2), 112.15 (R3)
