Sample Category Title

BoE Has Prepared Markets For a Rate Hike, Will it Deliver?

On Thursday, the Bank of England is widely expected to do something that a large group of people will never have experienced, raise interest rates.

For the first time in a decade and the first since the global financial crisis, policy makers will discuss the merits of a rate hike in a bid to prevent inflation moving too far above target. Or at least, that's what we're being told despite the acknowledgement that higher inflation is almost entirely down to the one-off currency depreciation that occurred since the Brexit referendum last year.

Inflation reached 3% in September, far above the central bank's 2% target and at the top of the range that the government deems acceptable before Governor Carney must write a letter to the Chancellor explaining why the central bank is failing to achieve its mandated target.

Interestingly, this is also around the level that the central bank expects inflation to peak at which begs the question why they've waited so long to raise interest rates. Also, why do they now deem it to be the right time to do so before we have a chance to find out how far it will fall again once the initial impact of the currency move falls out of the calculation?

If Inflation is Above Target, Why is a Rate Hike So Controversial?

As is to be expected in post-Brexit Britain, the decision on whether or not to raise interest rates is far from straightforward. This is clearly evident when listening to one of Carney's press conferences or appearances before the Treasury Select Committee, as well as in the rhetoric from his colleagues on the Monetary Policy Committee.

Not only does the inflation data and outlook not necessarily warrant a rate increase but the uncertain economic outlook muddies the water even further, which explains the divide on the committee.

It's quite clear that the economy has slowed since the vote last year, with the country falling from the top of the G7 growth table to the bottom in the first half of the year. Employment may have remained strong for now but with real wage growth having turned negative and spending slowed, it's clear that the economy is stalling which begs the question, is it really the correct time to raise interest rates?

The argument for the hawks on the MPC is that the economy hasn't slowed as much as was feared in the months after the referendum – partly due to the actions it took – and so a reversal of the rate cut in August 2016 makes sense.

While this hasn't been acknowledged by policy makers, there may also be a case that the BoE took a risk when cutting interest rates last year, taking base rate below the level that for the seven years previous was deemed to be the lower bound. Perhaps this is no longer seen as being a risk worth taking.

If this is the case then the BoE may refrain from committing to, or even hinting at, further rate hikes in the foreseeable future, which you would expect if this was in fact the beginning of a tightening cycle. Instead it may opt for the ECB approach of data dependent decision making. In other words, the less we know the better.

How Will Markets React to a Rate Hike?

Despite the divisions that we've seen within the MPC and the fact that the decision appears far from straightforward, investors are almost entirely convinced that the BoE will raise interest rates. In fact, according to Reuters, a rate hike is almost 90% priced in. That would suggest to me that a rate hike alone won't be enough to lift the pound or UK yields too much. A change of heart on the other hand could deal a big blow to both, not to mention the central banks credibility.

How the pound trades – and the FTSE for that matter given the inverse correlation that the two share - in the aftermath of the decision will likely depend on the minutes, economic projections and press conference that accompanies the decision.

Any indication that more rate hikes are planned for next year could trigger a sharp rally in the pound as I'm not convinced this is currently priced in, while anything else may weigh on the currency once the initial volatility – of which I expect a lot – has passed.

Super Thursday may for once live up to its name and I'm sure markets will be very sensitive to what policy makers have to say about the path of interest rates going forward, whatever the decision. Given the range of outcomes that we could see, UK markets could get extremely volatile and the upside and downside potential should not be underestimated.

A hawkish rate hike from the BoE could see GBPUSD blow through 1.33 and 1.36 being tested once again while no rate hike could see 1.30 severely tested, the success of which may depend on whether the increase is slightly delayed or postponed. In the case of the latter, I wouldn't be surprised to see 1.28 tested in the not-too distant future.

Despite a relatively hawkish statement from the Federal Reserve on Wednesday, the dollar edged lower against its major peers early Thursday. The assessment of economic activity seemed to have given the green light for a December rate hike. Policy makers see economic activity rising at a solid rate, despite hurricane-related disruptions. No amendments were made on household spendingand business fixed investment, which continues to pick up. On the inflation front, FOMC is no longer worried about a temporary boost to prices from storm-disruptions, and continues to see market-based measures of inflation compensation remaining low.

Rate hike expectations for December climbed to 98.2%, according to CME’s FedWatchTool, indicating that a third rate hike this year is completely priced in, and investors require new catalysts to act upon. The White House is likely to endspeculation on who will serve as the next chair of the Federal Reserve later today. Many reports have confirmed that Jerome Powell will be Donald Trump’s nominee. While it is believed that Mr. Powell will resume a very gradual normalization of monetary policy, he is expected to be more flexible in terms of financial deregulation. Unless we see a surprise,expect little or no impact on Treasury Yields and the U.S. dollar. Investors are also keeping a close eye on the announcement of tax reforms. There have been many conflicting reports on when and how much the tax rate on U.S. corporates would be lowered; any delay on that front will likely put some pressure on equities and the dollar.

Investors will shift attention to Bank of England’s monetary policy decision later today. The BoE is in a tough situation, given that inflation is running above the 2% target and growth is likely to slow in the coming quarters. Expectations of a 25-basis point rate hike is standing at around 90%, which indicates that Sterling has been pricing in the first-rate hike since 2007, for couple of months. However, traders are likely to act upon the MPC’s voting split, the updated economic forecast (Quarterly Inflation Report), and forward guidance. For instance, Sterling’s reaction on a 9-0 vote in favor of a rate increase, will differ a lot from 5-4. If the BoE decides to keep policy unchanged, Sterling would come under pressure, unless the BoE sends a clear message for a rate hike in December. Trading the BoE will prove to be a tricky one, given the many possible scenarios;however, I think the central bank will hike rates today and reassure markets that further monetary policy tightening will remain limited for the foreseeable future.

Sunrise Market Commentary

• Rates: Core bonds little moved after Fed meeting.
  The FOMC statement upgraded the economic situation to “solid” from “moderate” confirming its intention to raise rates in December. Today, Trump's announcement of the nomination of Mr. Powell as next Fed chair and the BoE rate hike will be the focus, but as these events are largely anticipation, the effect on core bonds should be modest ahead of the US payrolls.
• Currencies: Dollar fails to extend gains
  The dollar was better bid at the end of last week, but for now there are no follow-through gains. Today's eco data are no market movers for the dollar. A cautious risk-off sentiment and ‘political issues' might keep USD bulls on the sidelines ahead of tomorrow's US payrolls. EUR/GBP is testing key support as the BoE is largely expected to raise its policy rate today.

The Sunrise Headlines

• US equity indices ended narrowly mixed yesterday as strong opening gains gradually evaporated. Asian equities trade with modest losses overnight except for Japan that goes up about 0.5%.
• Jay Powell is expected to be the US president's nominee to serve as the next chair of the Fed, according to two White House officials. An official announcement is expected today.
• The BOE is set to increase rates for the first time in a decade. Mark Carney may signal even more tightening if the economy performs in line with new forecasts, but that's unlikely.
• The Fed reinforced expectations for a December rate hike. FOMC officials upgraded the economic activity to solid from moderate previously. It confirmed they expect inflation to eventually reach the 2% target.
• The House GOP tax bill expected today will impose a one-time tax of 12% on U.S. firms' offshore cash earnings. Tax writers also plan to phase out the 20% proposed corporate rate after a decade. Other measures include removing estate tax and restrictions on certain tax deductions.
• Australian dollar rallies the most in three weeks as trade and building data for September beat estimates. AUD/USD jumps again above the 0.77 handle.
• US and EMU eco data are unlikely to have much market impact, but the BoE meeting and Trump's Fed announcement will be highlights. Corporate earnings reports out today include Apple, Alibaba, Hugo Boss, Royal Dutch Shell, Credit Suisse and L'Oreal. Spain and France tap the bond market

Currencies: Dollar Fails To Extend Gains

USD fails to extend gains

On Wednesday, the dollar traded with a cautiously positive bias. The US eco data (ADP, ISM) were OK but close to expectations. The Fed left its policy unchanged. It kept a positive assessment on the economy, leaving the door open for a December rate hike. ‘Political issues' were a source of caution for USD bulls. Markets are pondering the impact of president Trump likely nomination of Mr. Powell as next Fed chairman. There is also a lot of uncertainty on the new tax bill. EUR/USD finished session at 1.1619 (from 1.1646). USD/JPY finished at 114.19 (from 113.64) but the key 114.45 area stays out of reach.

Overnight, Asian equities outside Japan mostly trade with modest losses. The US equity rally shows signs of fatigue. This weighs on Asian indices and on US yields. It also prevents the dollar to return to the recent highs against the euro and the yen. USD/JPY returned below the 114 handle while EUR/USD trades again in the mid 1.16 area. The Aussie dollar regained some ground after last week's setback supported by stronger than expected eco data. AUD/USD regained the 0.77 mark.

Politics rather than data to guide USD trading.

The EMU eco calendar contains only the final manufacturing PMI report and the German unemployment data, no market movers. In the US, the weekly initial jobless claims and the Q3 productivity figures are up for release. US president Trump is expected to nominate Jerome Powell as the next Fed Chairman. Markets also continue to look forward to additional details on the Tax reform plans. The proposition of tax cuts as such is a USD positive, but markets also want details on how these cuts will be funded. A lack of details on this issue might cap any further USD enthusiasm. Markets will also look forward to tomorrow's US payrolls

The dollar made a new up-leg at the end of last week. The move was partially a repositioning out of the euro after a soft ECB assessment. At the same time, the US data/news flow as was also USD supportive. The dollar maintained those gains this week, but there were no additional gains. Today, we keep a neutral to cautiously negative bias on the dollar. The data won't help and a cautious risk-off sentiment, recently often weighed more on US yields than on European ones. USD investors will look forward to tomorrow's US payrolls. LT we maintain a cautious EUR/USD sell-on-upticks bias. Of late, the dollar failed to gain against the euro despite widening interest rate differentials since early September. This trading dynamic was broken after the ECB decision last week Policy divergence between the ECB and the Fed is again on the radar. However, any additional rate support for the dollar will probably be modest near term, especially if Powell is nominated to succeed Yellen. So, further EUR/USD decline might develop gradually.

From a technical point of view, EUR/USD dropped below 1.1670/62 support, but there are no convincing follow-through gains yet. If the break is confirmed, it would signal that the recent EUR/USD uptrend is broken. EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside target on the charts. USD/JPY's momentum was positive in September. The pair regained 110.67/95 resistance, a positive. The 114.49 correction top is the next resistance. Sentiment improved last week, but the first test on Friday failed. We don't preposition for a sustained break higher.

EUR/USD broke below 1.1662 support, but breaks still needs to be confirmed

EUR/GBP

Sterling tests 0.8740/50 support ahead of BoE

Yesterday, sterling made some intraday swings against the euro, but at the end of the day the changes were limited. The UK eco data, including the UK manufacturing PMI, came out slightly stronger than expected. EUR/GBP touched a minor correction low after the report. However, a sustained break below 0.8743 support didn't occur. EUR/GBP finished the session at 0.8772; hardly changed from Tuesday. Cable finished the session at 1.3245 (from 1.3283).

Today, the UK construction PMI sis expected to rebound slightly from 48.1 to 48.5. However, the focus will be on the BoE policy decision and on the UK inflation report. The BoE is largely expected to raise rates by 25 basis points to 0.50%. Markets will keep a close eye at growth and inflation projections in the inflation report, looking for clues on additional rate hikes next year. Carney and Co will keep this option open. However, we doubt that there is room for a further rate hike anytime soon as long as the uncertainty on Brexit persists. In this context, we assume that there is a lot of good news discounted for sterling of late.

EUR/GBP staged a strong uptrend from April till late August with a top at 0.9307. Rising UK inflation and the BoE preparing markets for a rate hike caused a sterling rebound. This rebound did run into resistance. EUR/GBP tried to regain the 0.890.90 area, but there were no follow-through gains. The drop below the 0.8855 area (neckline minor double top) on Friday opened the way for a return to 0.8743 or even 0.8652 supports. The jury is still out, but we maintain the working hypotheses that this area will be tough to break in a sustainable way

EUR/GBP: testing first important support at 0.8743 ahead of the BoE decision

Download entire Sunrise Market Commentary

Currency pair GBP/USD

The GBP/USD is building a triangle above the broken resistance trend line (dotted red). Price was unable to break below the long-term support trend line (blue) and is now retesting the Fibonacci levels of wave 4 vs 3 (green). A break above the 61.8% Fib however makes a wave 4 unlikely.

The Bank of England (BOE) is expected to raise interest rates by a quarter percent for the first time in a decade. The rate hike could potentially send the GBP higher, although the currency pair will remain volatile as well during the inflation report, policy summary and press conference of the Bank of England Governor.

The GBP/USD is showing strong bullish momentum and could be in a wave 4 (blue) if price stays above the support trend line (blue). A bearish break could indicate that the wave A (brown) has been completed at the recent high.

Currency pair EUR/USD

The EUR/USD is still building a bullish retracement within wave 4 (blue). A break below the support of the sideways zone (green) could indicate the continuation of the wave 5 (blue) within a larger wave C (purple).

The EUR/USD will most likely complete the wave 4 (blue) if price breaks below the channel (green). In the meantime, price could retrace to deeper Fibonacci levels of wave 4 (blue) but typically should not break above the 61.8% Fibonacci level.

Currency pair USD/JPY

The USD/JPY strong bullish bounce is most likely indicating that one more bullish push is likely towards the 115-resistance level.

The USD/JPY needs to break above the resistance trend line (red) and small bull flag chart pattern (dotted red) to continue towards the Fibonacci targets at 115.

The Bank of England is widely expected to raise UK interest rates for the first time in 10 years today. An expected 0.25% rise, to 0.5%, will push UK interest rates back to pre-Brexit levels. UK inflation climbed to a 5 year high of 2.9% in August, significantly above the Bank of England's Monetary Policy Committee (MPC) target of 2% and September saw the rate increase to 3%. Recent data has indicated that the UK economy is performing better than expected, with growth rising to 0.4% in Q3 which, to many, is an indication that a rate hike will not adversely affect growth. The MPC stated in September that a 'majority' of members believed that some withdrawal of stimulus would be appropriate if the economy continues to grow at a steady pace. The markets are 'pricing-in' a 91.2% probability of a rate hike today. If the BoE does not raise rates the markets will put downward pressure on GBP. If rates rise, as expected, there may only be slight upward pressure on GBP, as the markets have already factored in a hike. Regardless of the announcement, we are likely to see volatility in GBP.

In the US on Wednesday, the US the Federal Reserve, as expected, kept interest rates unchanged. The Fed underscored recent data that indicates solid economic growth and a strengthening labor market. The markets are now expecting the Fed to hike rates in December. The ADP employment report on Wednesday said the private sector added 235K jobs last month, more than the 196K the markets had forecast. The better-than-expected ADP data suggests an improving job market, even aside from the recent storms. Such strong data is indicating the US has the resiliency to endure a rise in interest rates. The markets will be looking ahead to Friday's always impactful Non-Farm Payroll release for further confirmation of a robust labor market, which will, inevitably, underscore the likelihood of a December rate hike.

EURUSD is 0.3% higher in early trade at around 1.1656.

USDJPY is 0.2% lower in early Thursday trading at around 113.90.

GBPUSD has edged 0.3% higher overnight ahead of today's interest rate decision. GBPUSD is currently trading around 1.3285.

Gold has gained 0.36% on USD weakness to currently trade around $1,278.75.

WTI is little changed, currently trading around $54.35.

Major data releases for today:

At 09:00 GMT, the Bundesagentur für Arbeit published by the German Statistics Office will release the Unemployment Rate s.a. & Change for October. The rate is forecast to be unchanged at 5.6% with the change forecast at -11K, which is not as strong as the previous release of -23K.

At 09:30 GMT, the UK Chartered Institute of Purchasing & Supply and Markit Economics will release UK PMI Construction for October. The forecast is expected to show a slight decline to 48.0 from September's release of 48.1.

At 12:00 GMT, the Bank of England will announce its interest rate decision. The markets are expecting a hike of 0.25%, taking UK interest rates to 0.5%. Analysts are unanimous that the BoE will raise rates for the first time in 10 years, bringing UK interest rates back to pre-Brexit levels. The BoE will also release its Quarterly Inflation report, Monetary Policy Statement and Asset Purchase Facility, all of which will be overshadowed by the interest rate decision. Regardless of the interest rate decision the markets are likely to see higher volatility in GBP.

At 12:30 GMT, Bank of England Governor Mark Carney is scheduled to deliver a speech outlining the rationale behind the 12:00 noon interest rate decision. The markets will be looking for clues as to future monetary policy and the timing of future interest rate hikes.

The British pound continues to trade higher against the U.S dollar, despite a brief pullback, following a hawkish FOMC policy statement. FOMC policy makers yesterday kept interest rates on hold, but paved the way for a December rate hike. The GBPUSD pair currently trades around the 1.3280 level, head of today's key Bank of England interest rate decision and monetary policy statement.

The GBPUSD pair remains bullish while trading above the 1.3268 technical level. Further upside should be expected above 1.3267, towards the 1.3307, 1.3360 and 1.3400 levels.

Should price-action dip below the 1.3267 technical level, a further decline towards the 1.3236 and 1.3202 levels remains likely.

The euro is back under selling pressure against the U.S dollar, after being sharply rejected from its 200-day moving average, at the 1.1670 level. Better than expected U.S jobs figures and a hawkish FOMC policy statement have shifted buyers back into the U.S dollar index. The EURUSD pair currently trades around the 1.1650 level, ahead of the release of key eurozone manufacturing figures for the month of October.

The EURUSD pair remains bearish while trading below the 1.1670 technical level, intraday euro sellers will likely push the euro back towards the 1.1644 and 1.1610 support levels.

Should EURUSD buyers push price-action back above the 1.1670 level, intraday trading sentiment will likely turn bullish. Further upside towards 1.1690 and 1.1713 remains likely.

Bitcoin has been on an absolute tear as of late, with prices adding a staggering $1,000 over the past five days en route to new record highs.

BTC/USD reached a session high of $6,905.19 on Thursday, giving the digital asset a total market cap of $114 trillion. There are more than 16.659 bitcoin tokens in circulation, a figure that will continue to rise until the total reaches 21 million sometime around 2140.

Prices were last seen trending around $6,860, having gained more than 17% over the past five days. As one might expect, the extent of the rally has pushed bitcoin into overbought territory on the Relative Strength Index (RSI).

The world’s biggest cryptocurrency by market cap will fork into two on or about 16 November. That’s when the new SegWit2x protocol will be initiated. Miners say the new coin is unlikely to overtake bitcoin. What it will do, however, is generate significant volatility in certain pockets of the market.

Bitcoin has forked on two separate occasions this year, leading to the creation of Bitcoin Cash (BCH) and Bitcoin Gold (BTG).

Thursday is another action-filled day in the markets, as investors await a potentially landmark policy announcement from the Bank of England (BOE). The BOE is widely expected to raise interest rates as inflation continues to overshoot the central bank's 2% target.

On the data front, IHS Markit will release a bevy of PMI reports on Thursday covering Spain, Italy, France, Germany and the broader Eurozone. The final Eurozone manufacturing PMI is expected to hit 58.6 for October.

The BOE will likely raise rates by 25 basis points on Thursday, according to a consensus market forecast. That brings the rate back up to 0.5%, where it stood between 2009 and August 2016. The central bank quickly slashed rates in the wake of Brexit to avoid any potential downside risks following the landmark referendum. Six of nine Monetary Policy Committee (MPC) members are expected to vote for a hike.

That being said, policy normalization is still a distant pipedream. The UK's asset purchase facility is expected to hold steady at £435 billion per month.

In North America, the Labor Department will report on jobless claims, unit labor costs and nonfarm productivity at 12:30 GMT. The Institute for Supply Management (ISM) will release its New York business conditions index at 13:45 GMT.

Earlier in the day, the Australian government reported a much bigger than expected trade surplus for the month of September, as exports rose 3% and imports flat-lined. Canberra's trade surplus climbed to $1.745 billion in September, more than double the previous month's $873 million.

A separate report also showed an unexpected pick up in building permits. Australian building authorizations climbed 1.5% in September, following a downwardly revised gain of 0.1% the month before.

GBP/USD

The British pound could be in for an active session as the BOE signals for higher interest rates. Cable, which currently trades around 1.3280, is looking to overcome the critical resistance of 1.3336. That represents the high from October. Certainly, momentum generated from the BOE announcement could send prices north of that level. The BOE holds all the cards on Thursday.

AUD/USD

After a disastrous two weeks, the Australian dollar appears to be finally bouncing back. The AUD/USD exchange rate climbed half a percent on Thursday to reach 0.7716. The pair is bouncing from a test of the double bottom lows near 0.7620. Immediate support levels are located at 0.7650 and 0.7610. On the flipside, resistance is likely found at 0.7730 and 0.7775.

EUR/USD

Europe's common currency advanced on Thursday, although prices remained firmly capped below 1.1700 US. EUR/USD levels to watch include the 1.1670 resistance area. On the opposite side of the ledger, the region near 1.1600 provides a solid psychological support.

Key Highlights

• The British Pound started a nice uptrend from well below 1.3100 against the US Dollar.
• The GBP/USD pair surged higher recently and broke two important bearish trend lines at 1.3250 on the 4-hours chart.
• UK's Manufacturing PMI in Oct 2017 rose from the last reading of 55.9 to 56.3.
• Today, the BOE's interest rate decision is scheduled and the central bank is likely to raise rates from 0.25% to 0.50%.

GBPUSD Technical Analysis

The British Pound traded below the 1.3100 support on Oct 27, 2017 against the US Dollar. Later, the GBP/USD pair formed a solid support, started an uptrend and moved above 1.3200.

During the upside move, the pair was successful in breaking two important bearish trend lines at 1.3250 on the 4-hours chart. The pair also settled above the 100 simple moving average (H4, red), currently at 1.3210.

At present, the pair is struggling to settle above the 200 simple moving average (H4, green) at 1.3300. Should there be a close above 1.3300, there can be an upside drift towards the 1.3350 and 1.3400 levels.

On the downside, the broken resistance at 1.3250 may now act as a decent support if the pair corrects lower from the current levels.

UK Manufacturing PMI

Recently in the UK, the Manufacturing Purchasing Managers Index (PMI) for Oct 2017 was released by both the Chartered Institute of Purchasing & Supply and the Markit Economics. The forecast was lined up for a minor decline from the last reading of 55.9 to 55.8.

The actual result was better than the forecast, as the UK's Manufacturing posted an increase from 55.9 to 56.3. According to the report, both output and new order growth remain solid.

Commenting on the release, the Director at IHS Markit, Rob Dobson, stated:

UK manufacturing made an impressive start to the final quarter of 2017 as increased inflows of new work encouraged firms to ramp up production once again. The sector looks to be achieving a quarterly rate of expansion close to 1%, therefore sustaining the solid pace of growth signalled by the official ONS estimate for the third quarter.

Overall, the GBP/USD pair remains in an uptrend and if the BOE decides to increase rates in today's decision, there can be more upsides toward 1.3350-1.3400.

Economic Releases to Watch Today

BoE Interest Rate Decision – Forecast 0.50%, versus 0.25% previous.

Germany's Unemployment Change for Oct 2017 – Forecast -11K, versus -23K previous.

Germany's Unemployment Rate for Oct 2017 – Forecast 5.6%, versus 5.6% previous.

Euro Zone Manufacturing PMI for Oct 2017 – Forecast 58.6, versus 58.6 previous.

Germany's Manufacturing PMI for Oct 2017 – Forecast 60.5, versus 60.5 previous.

Spanish Manufacturing PMI for Oct 2017 – Forecast 54.9, versus 54.3 previous.

France Manufacturing PMI for Oct 2017 – Forecast 56.7, versus 56.7 previous.

Italian Manufacturing PMI for Oct 2017 – Forecast 56.8, versus 56.3 previous.

US Initial Jobless Claims – Forecast 235K, versus 233K previous.