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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)

The yellow metal's price moved in the last 24 hours, as it was forecasted on Thursday morning. The commodity price has reached the combined support of the weekly S1 and the monthly PP. The weekly first support, which is located at the 1,255.79 level, has clearly been passed. However, the monthly PP at the 1,253.00 mark is holding its ground. As it can be observed on the chart, the monthly level of significance has held off a fall of the bullion for nearly 20 hours. Although, if the monthly pivot point gets passed, the commodity price is most likely going to fall to the next level of significance, as the second weekly support is located at the 1,244.60 mark. Meanwhile, while trying to identify a pattern, only slight hints of a descending short term channel can be noticed.

On Thursday, the US Dollar surprised to the upside, having successfully outperformed the Japanese Yen. As a result, the given pair was able to reach the 111.00 handle, but even then refused to stop appreciating. The current target is the monthly pivot point, located at 111.79; this area could provide strong resistance and limit the further gains. This pivot point is also the only solid obstacle on the USD/JPY pair's path, which is preventing the Buck from reaching its main target— the seven-month down-trend. On the other hand, the Greenback could struggle to post further gains, as some indicators suggest the rally ran out of steam, such as the RSI, which reached its 70 reading today.

The British currency managed to erase all intraday losses yesterday and, thus, remain relatively unchanged against the Greenback. The rebound occurred from what appears to be the support line of a newly-forming ascending channel pattern, but additional confirmations are required to confirm if the channel is reliable. So far the exchange rate keeps gravitating towards the monthly S1, with risks skewed to the downside. Consequently, if the Cable experiences another decline today, the potential support would be the earlier-mentioned channel's support line around 1.2720. On the other hand, gains should be capped circa 1.2850, but a surge that far up today is doubtful, as there are no solid market movers expected to drive the given pair today.

It seems that the third bounce off from the long term resistance did the trick. The common European currency has declined against the US Dollar to the weekly S1, which is located at the 1.1148 level. This fall was long expected on larger timeframe charts. It is most likely now that the currency exchange rate will continue on its path lower. In the process a new medium term pattern is expected to form, which should provide guidelines about the probable direction of the Euro against the Buck in the upcoming few months. However, for now the target zone is unclear. Meanwhile, from a technical perspective it can be observed that a depreciation of the Euro against the US Dollar is to be expected.

'As long as the process of political stabilisation continues in Europe, the need for foreign exchange interventions should diminish.' — Maxime Botteron, Credit Suisse

As markets expected, the Swiss National Bank left its loose monetary policy and interest rates unchanged at its meeting on Thursday amid the high degree of uncertainty in Europe. Policymakers voted to leave the Libor rate at -0.75% and the three-month Libor target range at -1.25% to -0.25%. The Bank remained highly in favour of negative interest rates and was committed to forex interventions amid the significantly overvalued Swiss Franc. Nevertheless, the SNB noted that the global economy and labour markets were recovering as expected, while inflation growth remained moderate in the majority of developed economies. According to the Bank's forecasts, the domestic economy is expected to expand 1.5% this year, whereas inflation is set to rise 0.3%. In 2018 and 2019 the inflation rate is expected to climb 0.3% and 1.0%, respectively. The Bank expressed optimism over the economic outlook for the global economy. Also, monetary conditions in the United States are expected to 'gradually normalise' in the upcoming months. Thursday's data also showed that the Central bank bought $48.4B in Swiss francs this year.

'A slowdown in household consumption, and GDP as a whole, had recently begun, and it was too early to judge with confidence how large and persistent it would prove to be.' — Mark Carney, Bank of England

British retail sales dropped more than expected last month, pointing to high inflationary pressures driven by the weak Pound. The Office for National Statistics reported on Thursday that retail sales dropped 1.2% month-over-month in May, following the preceding month's upwardly revised gain of 2.5% and falling behind analysts' expectations for 0.9% drop. May's fall suggested that the sharp rise in inflation after the country's decision to leave the European Union started to put significant pressure on households that are the main GDP contributors. On an annual basis, retail sales climbed 0.9% during the reported month, whereas analysts anticipated a rise of 1.7%. Earlier this week, Visa reported that UK consumers cut their spending for the first time in almost four years in May. Later in the day, the Bank of England left its policy and interest rates at 0.25% but moved closer to the rate-rise trail, as three out of eight policymakers voted to raise rates, lifting the Sterling against other major currencies. However, some analysts suggested that the BoE would continue tolerating inflation above the 2% target for some time.

'At present, it appears the labor market data rather than the inflation data are in the driving seat for data-dependent Fed policy.' — John Ryding, RDQ Economics

The number of Americans filing for unemployment benefits dropped more than expected last week. The Labour Department reported on Thursday that initial jobless claims fell 8K to 237K in the week ended June 9, while market analysts anticipated a slighter decrease to 241K during the reported week. According to analysts, the US labour market is at or close to full employment, with the unemployment rate a 16-year low of 4.3%. Thursday's data also showed that the number of people continuing to receive jobless benefits rose 6K to 1.94M in the week ending June 3. Other data released by the Federal Reserve showed that import prices dropped 0.3% last month, following the prior month's downwardly revised rise of 0.2% and falling behind expectations for a 0.1% increase. Also, the New York State Fed reported that its Manufacturing Index for the region surged to 19.8 in June, up from May's -1.0, whereas the Philadelphia Fed's Manufacturing Index for the Philadelphia State fell to 27.6 points in June, whereas analysts anticipated a steeper drop to 25.5 from May's 38.8.

'Wages and the labor market are most closely linked to consumer prices. The labor market has tightened even further, so I think the BOJ wanted to highlight that point by upgrading its assessment on consumer spending.' — Hiroshi Miyazaki, Mitsubishi UFJ Morgan Stanley Securities

The Bank of Japan left its monetary policy and interest rates unchanged at its meeting on Friday but expressed optimism over the economic outlook for the domestic economy and its export sector. As expected, policymakers voted to keep the Bank's short-term interest rates at -0.1% and the yield on the 10-year Japanese government bond around zero. Moreover, the Central bank left the balance of its holdings increases at an annual pace of 80T yen ($729.33B). The BoJ's meeting followed the US Federal Reserve's meeting, at which US policymakers raised interest rates for the second time this year, predicted one more rate hike in 2017 and outlined a plan for shrinking the Bank's balance sheet. The BoJ pointed to low private consumption and attributed its weakness to subdued inflation growth. The Bank said that overseas economies, including emerging ones, continued expanding at a moderate pace. As to the domestic economy, the Bank said that the economy was stepping on a path of a moderate expansion. The BoJ is expected to remain on hold until it sees some improvement in inflation.

Cable retested key 1.2800 resistance zone (daily cloud top/55SMA/daily Tenkan-sen) on rally after surprise BoE rate vote o Thursday but upside remains limited for now. Strong signal of indecision was generated by double long-legged Dojis on Wed/Thu, with mixed technical studies (bearishly aligned dailies and neutral to positive techs on lower timeframes). The pair needs to break out of initial 1.2700/1.2800 range to generate stronger direction signals. In absence of economic releases from the UK, focus turns towards US housing data, due later today. Bullish scenario on sustained break above 1.2800 zone would open resistances at: 1.2841/46 (daily Kijun-sen/Fibo 61.8% of 1.2977/1.2635 downleg), 1.2858 (falling 20SMA and 1.2883 (falling 30SMA). Alternatively, loss of 1.2700 support zone (near Fibo 61.8% of 1.2635/1.2617 recovery leg) would weaken near-term structure and re-focus near-term base at 1.2640 zone, reinforced by 100SMA.

Res: 1.2795, 1.2806, 1.2817, 1.2846
Sup: 1.2750, 1.2722, 1.2704, 1.2690