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On Thursday, the Bank of England decided to keep interest rates and its two asset purchase programs unchanged. However, the pound rallied to a one-year high against the dollar and near to a two-month high versus the euro after the monetary statement revealed that the central bank might raise interest rates sooner than markets anticipate.

During European trading hours, the majority of the Monetary Policy Committee concluded that interest rates should remain steady at 0.25%, while the central bank should maintain government bond purchases at 435bn pounds and corporate bond purchases at 10bn pounds.The decision was taken as policymakers aimed for accommodative policy to support growth and the labor market even as inflation, currently at 2.9%, is running above the BOE's target of 2%.

However, the minutes of the meeting hinted that if the British economy develops as expected, then the MPC members see scope for stimulus reduction in the coming months "to a somewhat greater extent" than markets have forecasted. According to the statement, MPC members judged that interest rates should be raised gradually and to a "limited extent" over the coming months as they anticipate inflation to break above 3% in October and to continue fluctuating above the target for a couple of years, while unemployment has declined to a 42-year low. Markets are currently pricing a probability of 50% for rates to go up in November and an 80% chance in February 2018.

Besides that, the statement mentioned that risks to the economic outlook remain on track given the uncertainty around the Brexit talks and its impact on consumer and business behavior after the country leaves the European union. For that reason, the minutes noted that the committee will closely monitor any adjustments to the above that might affect the economic outlook and act accordingly in order to achieve its inflation goals.

Turning to the vote results, those were in line with forecasts. Seven out of nine members agreed to keep rates unchanged despite rumors that the BOE's chief economist, Andy Haldane, would follow the hawks, Ian McCafferty and Michael Sanders, who voted for a rate hike.

Looking at the reaction in forex markets, the pound touched a one-week low of $1.3149 in the wake of the decision but while markets were going through the statement, the currency surged by 1.70% to a one-year high of $1.3371, before retreating to $1.3357. Euro/pound tumbled by 1.24% near to a two-month low of 0.8874.

The US dollar rally continued today and we saw a sharp rise in volatility following the release of important macro data on inflation in America. The consumer price index for August increased by 0.4% versus the 0.3% expected and 0.1% in the previous period. Alongside the core consumer price index also grew by 0.2% which was in line with expectations and twice better than in July. Acceleration of inflation may force FOMC members to vote in favour of another interest rate hike in December and that will add further strength to the greenback. USD was under pressure over the past month due to internal political reasons with the current administration, the geopolitical confrontation with North Korea and the dovish mood of traders regarding a third rate increase by the Fed for 2017.

The pound ignored the positive trend of the USD due to hawkish rhetoric from the Bank of England. Despite leaving the key rate at 0.25%, officials of the central bank pointed to possible monetary tightening in the UK over the next months. At the same time, it was noted that in case of confident economic expansion the monetary policy may be tightened by more than what the market is expecting. These statements were met favourably by sterling bulls but their optimism may be hurt by negative news over Brexit talks or further US dollar strengthening.

The aussie kept losing ground despite the growth of employment by 54,200 in August compared to the 17,500 expected. The descending impulse is mostly explained by weak statistics from China, according to which industrial production slowed to 6.0 % growth in July which was 0.6% worse than expected. The Australian economy is particularly sensitive to changes in Chinese industrial data as the nation is the main importer of Australian commodities.

EUR/USD

The EUR/USD quotes demonstrated high volatility levels after the price was able to fix below 1.1925. This may be a reason for continued declines to 1.1750 and 1.1620. The MACD signal line on the 15-minute chart just crossed the zero line which points to a possible negative trend continuation. In case of growth resuming, the closet resistance lines will be located at 1.1925 and 1.2000.

GBP/USD

The bullish impulse on the GBP/USD chart resulted in the renewal of this year's highs. The closest target within the positive trend is at 1.3400 and its overcoming may stimulate investors to push the price up to the 1.3500-1.3600 range. In case of profit taking we may see a rollback with the closet goals at 1.3250 and 1.3150.

AUD/USD

The AUD/USD demonstrates a confident descending impulse after some consolidation near the 0.8000 level. The RSI on the 15-minute chart approached the oversold zone, that together with the price coming close to the angled support line, may result in an upward rebound soon with potential growth to 0.8000. The next target within the local descending trend will be at 0.7870.

USD/CHF - 0.9665

Most recent candlesticks pattern : N/A

Trend                                    : Near term up

Tenkan-Sen level                  : 0.9662

Kijun-Sen level                    : 0.9658

Ichimoku cloud top                 : 0.9598

Ichimoku cloud bottom              : 0.9552

Original strategy :

Sold at 0.9680, Target: 0.9580, Stop: 0.9705

Position : - Short at 0.9680

Target :  - 0.9580

Stop : - 0.9705

New strategy  :

Hold short entered at 0.9680, Target: 0.9580, Stop: 0.9705

Position : - Short at 0.9680

Target :  - 0.9580

Stop : - 0.9705

Although the greenback has jumped again in NY morning and rose briefly above 0.9700 level, loss of upward momentum should prevent sharp move beyond there and consolidation with mild downside bias remains for test of support at 0.9618 but break there is needed to signal an intra-day top is formed, bring weakness to 0.8584 support, break there would provide confirmation, bring subsequent fall towards the lower Kumo (now at 0.9552).

In view of this, we are inclined to turn short on further subsequent rise. Above said resistance at 0.9705 would extend gain to 0.9725-30 but still reckon upside would be limited and 0.9761-66 (50% Fibonacci retracement of 1.0100-0.9421 and previous resistance) should hold, risk remains for another retreat to take place soon.

GBP/USD - 1.3388

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.3274

Kijun-Sen level                    : 1.3274

Ichimoku cloud top              : 1.3283

Ichimoku cloud bottom        : 1.3245

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Despite intra-day brief drop to 1.3153, lack of follow through selling on break of support at 1.3161 and the subsequent rally signal recent upmove is still in progress and further gain towards 1.3410-15 (61.8% projection of 1.2909-1.3329 measuring from 1.3153) cannot be ruled out, however, loss of upward momentum should prevent sharp move beyond 1.3440-50 and reckon 1.3470-80 would hold from here, risk from there has increased for a retreat later.

In view of this, would not chase this rise here and would be prudent to stand aside in the meantime. Below 1.3340-45 would bring pullback to 1.3300-05 but only break of the Kijun-Sen (now at 1.3274) would signal an intra-day top is formed, bring weakness to 1.3250, however, downside should be limited to 1.3195-00. 

EUR/USD - 1.1878

Most recent candlesticks pattern   : N/A

Trend                      : Near term down

Tenkan-Sen level              : 1.1874

Kijun-Sen level                  : 1.1890

Ichimoku cloud top             : 1.1974

Ichimoku cloud bottom      : 1.1964

Original strategy  :

Bought at 1.1855, Target:1.1955, Stop: 1.1835

Position : - Long at 1.1855

Target :  - 1.1955

Stop : - 1.1835

New strategy  :

Hold long entered at 1.1855, Target:1.1955, Stop: 1.1835

Position : - Long at 1.1855

Target :  - 1.1955

Stop : - 1.1835

As the single currency slipped again in NY morning and dropped to as low as 1.1838, as euro found support there and has rebounded, retaining our near term bullishness and as long as said support holds, mild upside bias remains for another bounce to previous support at 1.1926, however, break above there is needed to signal an intraday low is formed, brig further gain to 1.1950-55 and then 1.1975-80 but price should falter below yesterday’s high at 1.1995.

In view of this, we are holding on to our long position entered at 1.1855. Below said support at 1.1838 would signal recent decline from 1.2093 top is still in progress and may extend weakness to 1.1823 support, however, still reckon downside would be limited to 1.1800 and bring rebound later.

USD/JPY - 110.65

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 110.68

Kijun-Sen level                  : 110.67

Ichimoku cloud top             : 110.07

Ichimoku cloud bottom      : 109.41

Original strategy  :

Buy at 109.65, Target: 110.65, Stop: 109.30

Position :  -

Target :  -

Stop : -

New strategy  :

Buy at 109.65, Target: 110.65, Stop: 109.30

Position :  -

Target :  -

Stop : -

As the greenback has maintained a firm undertone after this week’s rally, suggesting bullishness remains for the rise from 107.32 low to extend further gain towards 111.10-15, however, break there is needed to retain upside bias and encourage for headway to 111.40, having said that, near term overbought condition should prevent sharp move beyond another previous resistance at 111.71, bring retreat later.

In view of this, would not chase this rise here and would be prudent to buy dollar on subsequent pullback as 109.50-60 should limit upside. Below previous resistance at 109.40 would risk correction to 109.20 but only break there would abort and signal top is formed instead, bring weakness to 109.00 first.

EUR/GBP - 0.8898

Original strategy  :

Sell at 0.9095, Target: 0.8955, Stop: 0.9135

Position : -

Target :  -

Stop : -

New strategy  :

Sell at 0.8980, Target: 0.8850, Stop: 0.9020

Position : -

Target :  -

Stop : -

 
The single currency only recovered to 0.9048 and has dropped again, bearishness remains for there selloff from 0.9307 top to extend weakness to 0.8845 (50% Fibonacci retracement of 0.8384-0.9307), however, near term oversold condition should limit downside to 0.8800-10 and reckon 0.8780-85 would hold from here, risk from there has increased for another rebound later.

In view of this, would not chase this fall here and we are looking to sell euro on recovery as previous support at 0.8982 (now resistance) should limit upside and bring another decline later. Above 0.9000-10 would defer and risk rebound to said resistance at 0.9048 but only break there would signal low is formed instead, bring a stronger recovery to 0.9090-00.

Our preferred count is that, after forming a major top at 0.9805 (wave V), (A)-(B)-(C) correction is unfolding with (A) leg ended at 0.8400 (A: 0.8637, B: 0.9491 and 5-waver C ended at 0.8400. Wave (B) has ended at 0.9413 and impulsive wave (C) has either ended at 0.8067 or may extend one more fall to 0.8000 before prospect of another rally. Current breach of indicated resistance at 0.9043 confirms our view that the (C) leg has ended and bring stronger rebound towards 0.9150/54, then towards 0.9240/50.

USD/CAD - 1.2185

Trend:  Down

 
Original strategy       :

Sold at 1.2240, Target: 1.2080, Stop: 1.2300

Position: - Short at 1.2240

Target:  - 1.2080

Stop: - 1.2300

 
New strategy             :

Hold short entered at 1.2240, Target: 1.2080, Stop: 1.2240

Position: - Short at 1.2240

Target:  - 1.2080

Stop:- 1.2240

Although the greenback has rebounded in NY morning, reckon upside would be limited and bearishness remains for recent decline to resume after consolidation, below 1.2130 would signal the rebound from 1.2061 has ended, bring retest of this level later, below there would confirm recent decline has resumed and extend weakness towards psychological support at 1.2000 but loss of downward momentum should prevent sharp fall below 1.1950-60, bring rebound later. We are keeping our count that wave v as well as wave (C) ended at 1.3794 and impulsive wave (i ii, i ii) is now unfolding with minor wave iii ended at 1.2414, followed by wave iv correction ended at 1.2778, wave v has reached our indicated downside target at 1.2100 and may extend to 1.2000.

In view o this, we are holding on to our short position entered at 1.2240. Above 1.2240-50 would risk rebound to 1.2300 but only break there would defer and signal a temporary low has been formed, bring a stronger rebound to 1.2335-40, however, upside should be limited to resistance at 1.2429 and price should falter well below 1.2490-00.

To recap, wave B from 1.3066 is unfolding as an a-b-c and is sub-divided as a: 1.2192, b: 1.2716 and wave c is a 5-waver with i: 1.1983, ii: 1.2506, extended wave iii with minor iii at 1.0206, wave iv ended at 1.0781 and wave v as well as wave iii has ended at 0.9931, hence the subsequent choppy trading is the wave iv which is unfolding as (a)-(b)-(c) with (a) leg of iv ended at 1.0854, followed by (b) leg at 1.0108 and (c) leg as well as the wave iv ended at 1.0674. The wave v is sub-divided by minor wave (i): 0.9980, (ii): 1.0374, (iii): 0.9446, (iv): 0.9913 and (v) as well as v has possibly ended at 0.9407, therefore, consolidation with upside bias is seen for major correction, indicated target at 1.3700 and 1.4000 had been met and further gain to 1.4700 would be seen later.

Good day traders! Let's take a good look at GBPUSD and GBPJPY, and how they both look similar.

GBPJPY made a new push higher, now a sharp leg into sub-wave v of 3 that can search for resistance near the Fibonacci ratio of 61.8 and near the upper channel line. Once wave 3 finds resistance, a new three-wave temporary correction may come in play, with potential support coming in at 145.19 level.

GBPJPY, 1H

GBPUSD also made a new sharp and strong leg higher, away from the 1.3150 region. We see this bounce as final wave 5, that can search for resistance near the Fibonacci ratio of 61.8. From there a new three-wave drop can come in play.

GBPUSD, 1H

Bank of England sends hawkish signal to markets

As expected, the Bank of England (BoE) maintained the Bank Rate at 0.25% and kept the targets for the government bond purchases and corporate bond purchases at GBP435bn and GBP10bn, respectively. In line with our call, the vote count for the Bank Rate was 7-2, but we were caught by surprise by the warning of a possible forthcoming rate hike 'over coming months' if underlying inflation moves higher and the unemployment rate moves lower.

The tightening bias challenges our view that BoE will stay on hold through Brexit negotiations due to high political uncertainty and slower growth. The policymakers have become more concerned about the combination of unemployment below NAIRU and inflation above the 2% target. CPI inflation surprised on the upside in August, as it rose to 2.9% and the unemployment rate dropped to 4.3%, the lowest rate since 1975. While BoE expects growth to remain around 0.3% q/q in the short term, it now expects CPI inflation to rise above 3% in October and the unemployment rate to decline further.

As BoE usually acts on the big meetings, the question is now whether it will hike at the next meeting in November or not. We think a hike in November is a close call but given that one condition is 'a gradual rise in underlying inflationary pressure', which we interpret as higher wage growth, we still think BoE will stay on hold this year. The incoming labour market and inflation data until the November meeting are going to be very important for BoE's decision. That said, BoE has consistently overestimated wage growth in recent years and one important assumption in the projections in the August Inflation Report was higher wage growth. Our base case is now a hike in Q1 18, as BoE is less worried about political uncertainty and more focused on economic data. Market pricing seems fair, as a November BoE hike is priced in by approximately 60% and a full hike is priced in by February.

EUR/GBP: risks more evenly balanced near term

With the prospect of a BoE rate hiking cycle materialising earlier than we previously foresaw, the GBP has been brought back to life. In an environment where the EUR uptick is losing steam and the market remains stretched on GBP shorts, we have to admit that risks in EUR/GBP are now more balanced than what we had laid out (previously saw risks tilted to the upside for the cross near term).

That said, our preposition remains that EUR/GBP will have a hard time breaking significantly lower from here as Brexit uncertainty is set to be a subjugate for the GBP for an extended period of time. Near term, the cross should be capped around the 0.88 level (which prevailed before the summer uptick) but, further out, if the BoE initiates a hiking cycle, the adjustment towards fundamentals – our Brexit-corrected Medium-Term Valuation (MEVA) estimate for the cross is around 0.83 – could take place faster than our current forecasts (0.88 in 12M) project.