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Daily Pivots: (S1) 111.35; (P) 111.75; (R1) 112.11; More...

Intraday bias in USD/JPY remains neutral for the moment. With 111.24 minor support intact, further rise is still mildly in favor. Above 112.14 will target 113.17 resistance next. Firm break there will resume larger rally from 104.62 for 114.73 key resistance next. On the downside, below 111.24 minor support might extend the corrective fall from 113.17 with another decline. But downside should be contained by 38.2% retracement of 104.62 to 113.17 at 109.90 to bring rebound.

In the bigger picture, corrective fall from 118.65 (2016 high) should have completed with three waves down to 104.62. Decisive break of 114.73 resistance will likely resume whole rally from 98.97 (2016 low) to 100% projection of 98.97 to 118.65 from 104.62 at 124.30, which is reasonably close to 125.85 (2015 high). This will stay as the preferred case as long as 109.36 support holds.

Daily Pivots: (S1) 0.9901; (P) 0.9918; (R1) 0.9937; More...

At this point, USD/CHF is still bounded in range of 0.9866/9977 in spite of today's strong rebound. Intraday bias stays neutral first. On the upside, above 0.9977 will bring retest of 1.0067 first. Decisive break there will resume larger rally from 0.9186. On the downside, below 0.9866 will extend the fall from 1.0067 through 0.9856 to 0.9787 support. As price actions from 1.0056 are seen as a corrective pattern, downside should be contained by 38.2% retracement of 0.9186 to 1.0056 at 0.9724 to bring rebound.

In the bigger picture, current development suggests that the consolidation pattern from 1.0056 is extending with another leg. As long as 38.2% retracement of 0.9186 to 1.0056 at 0.9724 holds, we'd expect rise from 0.9186 to resume at a later stage to retest 1.0342 key resistance (2016 high). However, sustained break of 0.9724 will bring deeper fall, as another declining leg in the long term range pattern.

Daily Pivots: (S1) 1.1646; (P) 1.1673 (R1) 1.1691; More.....

EUR/USD weakens further today but it's still bounded in the consolidation pattern from 1.1509. Intraday bias stays neutral. In case of another rise as the consolidation extends, upside should be limited by 1.1851 resistance to bring fall resumption eventually. On the downside, decisive break of 1.1507 low will resume larger down trend from 1.2555 through 50% retracement of 1.0339 to 1.2555 at 1.1447.

In the bigger picture, EUR/USD was rejected by 38.2% retracement of 1.6039 (2008 high) to 1.0339 (2017 low) at 1.2516. And, a medium term top was formed at 1.2555 already. Decline from there should extend further to 61.8% retracement of 1.0339 to 1.2555 at 1.1186 and below. For now, even in case of rebound, we won't consider the fall from 1.2555 as finished as long as 1.1995 resistance holds.

EURGBP has advanced considerably over the last few hours and jumped above the 0.8900 handle. Price action is at the momentum taking place above the 20- and 40-simple moving averages in the daily timeframe. The technical picture supports that the rebound on 0.8865 is likely to continue in the short-term.

From the technical point of view, the Relative Strength Index (RSI) is pointing upwards and is standing in the positive territory, however, the MACD oscillator dropped below its trigger line but is still above the zero line.

If prices continue to head higher, resistance should come from the more than three-month high of 0.8960. A jump above this key level would reinforce the short-term bullish view and open the way towards the 0.9030 hurdle, taken from the peak on October 12.

On the flip side, should a downside reversal take form, immediate support will likely come from the 0.8865 barrier and then from the 40-day SMA near 0.8838 at the time of writing. Even lower, the 0.8700 psychological level could be another target given that the zone has been frequently tested in the past.

Regarding the medium-term picture, the market is expected to jump above the 0.8960 high to create a strong bullish tendency as it remains in a weak mode over the last year.

Cable slumped near psychological 1.30 support, following short-lived post-BoE spike to 1.3124, as post-rate decision comments from BoE Governor Carney soured the sentiment. The Bank of England raised interest rates by quarter of point as expected, with unanimous 9-0 vote giving initial boost the pound. Dovish hike left sterling little space for advance as Carney poured cold water by comments that the central bank is not in hurry to further raise rates, as rising uncertainty over Brexit overshadows the outlook. The central bank signaled that next hike could not be expected before the first half of the next year, if there will be sufficient evidence that UK economy is doing well and more important if Brexit talks go smoothly. On the other side, disorderly Brexit could keep the central bank on hold for extended period of time, which would be negative scenario for sterling. Bounce from session low at 1.3015 proves 1.30 zone as strong support, with further hesitation to be expected before final break lower. However, firmly bearish daily techs, accompanied with negative sentiment, suggest limited recovery and keep strong bearish bias in play for further weakness.

Res: 1.3085; 1.3120; 1.3153; 1.3167
Sup: 1.3015; 1.3000; 1.2957; 1.2897

• Profit taking seen as MPC doesn’t combine hike with hawkish rhetoric;
• Will hike be seen as brave or stupid come March?

Sterling tumbled on Thursday after the Bank of England raised interest rates by 0.25% to a post-financial crisis high.

The hike, which was initially planned for May prior to the first quarter slowdown, has not come without it criticism due to the mixed data, temporary factors driving some numbers and the uncertain outlook, associated with Brexit. It was, however, almost fully priced into the markets with investors correctly drawing on the central bank’s previous views on the labour market and deafening silence as market rates rose in the run up to the meeting.

With markets pricing in more than a 90% probability of a hike prior to the meeting, it left little room for confirmation of it to have an impact. While this did come in the immediate aftermath of the hike, the lack of any apparent hawkish language alongside it or warning that more hikes will follow in the near-term appears to have triggered some profit taking on those pre-meeting positions and possibly even stops being hit after that.

The result is that, despite an initial rally, the pound plummeted shortly after falling back towards 1.30 against the dollar, 145 against the yen and 1.12 against the euro (or 0.89 for EURGBP). The central bank once very keen to emphasise though that rate increases were likely to be gradual and limited, citing market expectations of three over the next three years, while also stressing the uncertain influence of Brexit, despite it assuming a smooth transition in its forecasts. All of this lacked the hawkishness that traders were obviously hoping for which aided the decline in the pound.

I think it’s clear that the BoE could have held off on the decision today until it had more certainty on Brexit – maybe even by November – and avoided the possibility that it will have to do an embarrassing u-turn in the near future. That said, it backed itself into a corner earlier this year and clearly decided it’s a risk worth taking and should negotiations take a turn for the better and the economic data improve as a result, we could look back on this as a brave and calculated move that set us on a path towards policy normalisation.

The Bank of England’s monetary policy committee has certainly surprised financial markets today by voting unanimously to raise interest rates to 0.75%, the highest level since the 2008 financial crisis.

For those who may be wondering why the central bank has pulled the trigger despite growing Brexit-related uncertainty, the answer can be found in the subsequent, hawkish policy statement. According to the BoE, the first quarter slowdown in economic growth was temporary, with growth momentum recovering during the second quarter of 2018. GDP growth was expected to expand 1.4% in 2018, with growth averaging 1.7% per year through 2020, while inflation was seen cooling to 2.2% next year. Although the Pound initially appreciated following the hawkish hike, comments from Mark Carney during his press conference sent the currency collapsing like a house of cards.

The Pound’s sharp decline could be based on investors acknowledging that today’s rate hike is a “one-and-done” move. With Brexit uncertainty, cooling inflationary pressures and global trade tensions likely to obstruct the central bank's efforts to raise interest rates, the Pound remains vulnerable to downside risks.

Regarding the technical picture, the GBPUSD has crashed over 100 pips with prices trading around 1.3024 as of writing. A solid close below the 1.3000 level could inspire bears to challenge 1.2940.

Sterling falls sharply today even though BoE delivers the highly anticipated rate hike. Selloff comes in after the dovishness as seen in the inflation report is confirmed by Carney's press conference. Australian Dollar and New Zealand Dollar follow as the second weakest on risk aversion. The stock markets are in deep worry over further escalation in US-China trade tension. On the other hand hand, Yen is the clear winner today on risk aversion. Dollar follows as the second strongest as it always benefits from heat up in trade war.

In other markets, European indices are all in red today. FTSE is trading down -0.92% at the time of writing, DAX Is down -1.55% and CAC is down -0.63%. Earlier today, China Shanghai SSE closed down -2.0% at 2768.02. 2700 is now back in radar. Hong Kong HSI lost -2.21% and Nikkei dropped -1.03%. The usually resilient Singapore Strait Times also declined -1.28%. US futures point to lower open and DOW could lose triple digit in initial trading. WTI crude oil is back at 67.27 after failing to sustain above 70. Gold edges lower today but is still staying above 1211.65 support, July's low. At the time of writing, 10 year yield is trading at 2.988 and a point to watch is whether is will regain 3% handle again.

Technically, GBP/USD's sharp fall and break of 1.3070 finally indicates completion of recent corrective rebound from 1.2956, at 1.3212. Deeper fall should now be seen back to 1.2956 low. GBP/JPY's break of 145.25 resumes recent fall from 149.30 for 143.18/76 key support zone. While Dollar is strong, it's still held in range of 1.1574/1790 in EUR/USD, 0.7309/7483 in AUD/USD. And even GBP/USD is holding above 1.2956 low. More is needed to trigger an upside breakout in the greenback. Probably, non-farm payrolls tomorrow is the one that makes it.

BoE hikes but delivers dovish projections, Carney said policy needs to walk not run

BoE announced to raise Bank Rate by 25bps to 0.75% today, as widely expected. While the voting was unanimous 9-0, the overall announcement is seen as dovish, which is later confirmed in Governor Mark Carney's press conference. BoE maintained tightening bias and said "ongoing tightening of monetary policy over the forecast period would be appropriate". However, the pace of rate hike will be gradual and limited.

The new projections in the quarterly Inflation Report suggests that after this rate hike, there would be a lot of room for BoE to wait and see. And, there could be only one more hike within the forecast horizon through Q3 2021. That's how "gradual and limited" the rate path can be.

In the current conditioning path, the Bank rate will hit 0.9% in Q4 2019 1.1% in Q4 2020 and stay there till Q3 2021. In May's conditioning path, the Bank rate will reach 1.0% already in Q3 2019, and then 1.2% in Q3 2020 and stays there till Q2 2021. That is, the current path argues that the next hike could happen in Q1 2020, instead of Q3 2019. And there could be no more rate hike in the forecast horizon.

Also, with such conditioning path, GDP (exclude backcast) is projected to growth faster by 1.5% in the four-quarter to Q3 2018, and 1.8% in the four-quarter to Q3, 2019. But GDP growth in the four-quarter to Q3 2020 is unchanged at 1.7%. Inflation will return to target later at 2.0% in Q3 2021, instead of Q3 2020. But, at 2.2% in Q3 2019 and 2.1% in Q3 2020, it's reasonably close to target.

In the press conference, Carney said that tightening would be gradually as "structural factors that have pushed down the trend equilibrium real rate are likely to persist." It will be limited because "domestic short-term factors (particularly headwinds from uncertainty and fiscal drag) will fade slowly." Also also R* is expected to rise only gradually, and "policy needs to walk - not run".

UK PMI construction rose to 55.8, impressive turnaround of the construction sector

UK PMI construction rose sharply to 55.8 in July, up from 53.1 and beat expectation of 52.8. Markit noted the robust and accelerated rise in construction activity Housing building expanded as the fastest pace since December 2016. Also, rates of new order growth and job creation gain momentum. Tim Moore, Associate Director at IHS Markit hailed that "July data reveal an impressive turnaround in the performance of the UK construction sector, with output growth the strongest for just over one year."

Also release in European session, Eurozone PPI rose 0.4% mom, 3.6% yoy in June. Swiss PMI manufacturing rose 0.3 to 61.9 in July. Swiss retail sales rose 0.3% yoy in June. Swiss SECO consumer confidence dropped sharply to -7 in July.

China condemns US for playing two-handed strategy in trade war

In a rather un-speedy way, China issued a rather strong statement in response to Trump's initiative to impose 25% tariffs on USD 200B in Chinese imports. The Ministry of Commerce criticized the US for playing a "two handed" strategy. Firstly, the US spread rumors of re-engagement. Secondly, it announced the above tariff intention. the MOFCOM condemned the US for "disregarding the interests of the whole world, as well as those of the common Americans, businessmen and consumers". And China emphasized that such practice will have "no effect on China".

MOFCOM also pledged that China is "fully prepared for counter-measures to defend the country's dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries in the world". And it reiterated the stance on resolving differences through dialogue, "but only under the principal of equality and keeping promises".

The reactions in China stocks to renewed trade war threat are loud and clear. The Shanghai SSE composite closed down -2.0% at 2768.02. The breach of 2753.83 support affirmed our view that rebound from 2691.02 has completed at 2915.29, ahead of 55 day EMA and key well inside medium term falling channel. The index should revisit the key support zone between 2016 low of 2638.30 and 2700. This is an area which could prompt serious government intervention.

DIHK: US-China trade conflicts have huge impact on German companies

A survey by the German DHIK Chambers of Industry and Commerce warned that escalating US-China trade conflict is already hurting German companies.

41% of German companies doing business in China said they were affected by higher tariffs when exporting to the US. And 46% said highest cost importing from the US.

57% of German companies doing business in the US said there were negative effects exporting to China. 75% reported higher costs when importing from China.

DIHK trade chief Volker Treier said "the dangerous trade dispute between the U.S. and China is also hitting German companies doing business in the two countries." He added, "the impact is huge: nearly half of the imports from German companies are directly or indirectly affected by the new tariffs, for example because they source raw materials or components from the other country." He also warned that "a further escalation of the dispute would be a threat to world trade as a whole."

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3098; (P) 1.3122; (R1) 1.3148; More...

GBP/USD's strong break of 1.3070 minor support indicates that corrective rise from 1.2956 has completed at 1.3212 already. Intraday bias is back on the downside for 1.2956 short term bottom first. Decisive break there will resume larger decline from 1.4376 for 1.2874 fibonacci level next. For now, the consolidation pattern from 1.2956 could still extend with another rebound through 1.3212. But even in that case, upside should be limited by 1.3362 resistance to bring larger decline resumption eventually.

In the bigger picture, whole medium term rebound from 1.1946 (2016 low) should have completed at 1.4376 already, after rejection from 55 month EMA (now at 1.4179). Fall from 1.4376 should extend to 61.8% retracement of 1.1946 (2016 low) to 1.4376 at 1.2874 next. Decisive break of 1.2874 will raise the chance of long term down trend resumption through 1.1946 low. On the upside, break of 1.3362 resistance is needed to be the first indication of medium term bottoming. Otherwise, outlook will remain bearish even in case of strong rebound.

Economic Indicators Update

BOE surprisingly voted unanimously to raise the Bank rate, by +25 bps, to 0.75%. This marks the first increase since last November and the second since global financial crisis. The Committee revised higher forecasts for GDP growth and inflation for this year and in 2019. At the press conference, Governor Mark Carney signaled further rate hikes are likely so as to keep inflation around the +2% target. British pound initially climb higher before tumbling. GPBUSD has slumped to almost a 2-week low of 1.3013 at the time of writing this report.

Updated Economic Forecasts:

As we have mentioned in the preview, economic recovery in the second quarter has reinforced the view that the slowdown in the first quarter was driven by temporary factors, rather than underlying weakness. At the minutes for the August meeting, BOE suggested that “recent data appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter”. Moreover, “the labour market has continued to tighten and unit labour cost growth has firmed. The MPC continues to judge that the UK economy currently has a very limited degree of slack. Unemployment is low and is projected to fall a little further”.

On inflation, the members acknowledged that “CPI inflation was +2.4% in June, pushed above the +2% target by external cost pressures resulting from the effects of sterling’s past depreciation and higher energy prices. The contribution of external pressures is projected to ease over the forecast period while the contribution of domestic cost pressures is expected to rise”. Indeed, at the press conference Carney admitted that inflation will be over the Bank’s +2% target over the next 3 years, if interest rates stay at 0.75%. this appears to signal that further rates are likely so as to prevent inflation overshoot. However, BOE reaffirmed the stance that “any future increases in Bank Rate are likely to be at a gradual pace and to a limited extent”.

The major downside risk to growth and to further rate hike remains Brexit uncertainty. BOE reiterated that “the economic outlook could be influenced significantly by the response of households, businesses and financial markets to developments related to the process of EU withdrawal”.

Concerning BOE’s estimate of the neutral rate (R*), the level at which interest rates should be set to ensure the economy stays at an even keel. The central bank’s estimate of the R* is 0-1%, more than 2 percentage points below its pre-financial crisis level, as pulled down by UK productivity, fiscal headwinds and economic uncertainty. Carney added that if all those improve, R* could move closer to the 2-3% range.

The bounce of British pound proves short-lived. We believe the renewed selloff of the currency was driven by the affirmation that further rate hike would be “gradual” and limited. While Carney has hinted that the next move would be a hike, rather than a cut, this has already been priced in. Meanwhile, the market tends to be skeptical over Carney’s hawkish comments amidst his “unreliable boyfriend” image. Another disappointment comes from the low R*. While the level of such rate might change over time, the upper bound, at 1%, estimated currently signals further rate hike is limited.

China finally issued a rather strong statement in response to Trump's initiative to impose 25% tariffs on USD 200B in Chinese imports. The Ministry of Commerce criticized the US for playing a "two handed" strategy. Firstly, the US spread rumors of re-engagement. Secondly, it announced the above tariff intention. the MOFCOM condemned the US for "disregarding the interests of the whole world, as well as those of the common Americans, businessmen and consumers". And China emphasized that such practice will have "no effect on China".

MOFCOM also pledged that China is "fully prepared for counter-measures to defend the country's dignity and the interests of the people, defend free trade and the multilateral system, and defend the common interests of all countries in the world". And it reiterated the stance on resolving differences through dialogue, "but only under the principal of equality and keeping promises".

Here is the full statement in simplified Chinese.