The GBP/USD pair flirted with 1.5202 in Europe before falling to 1.5113 levels after the Bank of England left the key rates unchanged and maintained the dovish tone intact. The vote count remained unchanged at 8-1 and the bank noted a slight slowdown in the nominal pay growth.
Key Takeaways from Thursday
The markets continue to ignore the worsening UK trade deficit. The UK current account to GDP ration hit record lows for last three years and appears on track to do the same this year as well.
The Bank of England is no longer tagging along with the Fed. The BOE policy statement and minutes carried the dovish tone, which was widely expected, despite which the Sterling fell 80 pips. The action in Sterling indicates the traders were expecting the BOE to turn a little hawkish, given that the Fed liftoff is pretty much a done deal.
No BOE liftoff in 2016?
The odds of BOE liftoff are falling each passing day (low inflation, UK trade deficit). Markets were expecting that the BOE would lift rates in Q3 2016. However, a bigger threat is unfolding –
- UK miners/energy firms may add to unemployment – Aprox. 5,500 jobs have already disappeared in the North Sea oil sector. The Mining heavyweight Anglo American also cut 85,000 jobs. With a little/no scope for recovery in commodity prices, the situation could easily worsen. Miners/energy firms can withstand low commodity prices only if the domestic consumption spikes in response to low prices. However, consumption is anaemic and thus BOE could be forced to delay its liftoff further out in 2016 or in 2017.
Eyes on US retail sales
As for today, a better-than-expected US retail sales could trigger a USD rally, while a weaker print could hurt USD, but is unlikely to have any impact on the Fed rate hike probability. At the most, ta horribly weak number could mean the fed rate hike next week will be far lower than the conventional 25 bps move.
Technical – Flirting with trend line support
- The pair failed to continue its bullish bias yesterday and fell to 1.5113, but managed to end above the falling trend line (blue)
- As of now the spot is flirting with the trend line. A break below would bring in support at 1.5113 (23.6% of 1.5819-1.4895).
- Wednesday’s daily close above 1.5159, followed by Thursday’s rebound from 1.5113 and close above the trend line (blue) indicates a drop to 1.5113 today is likely to be followed by a re-test of 1.52 levels.
- A convincing break above 1.52 would open doors for 1.5248 (50% of Apr-Jun rally+38.2% of 1.5819-1.4895).
EUR/USD Analysis: Back below 1.10, for how long?
The EUR/USD fell back below 1.10 on Thursday as hopes of the Fed liftoff next week supported the greenback. The shared currency fell from the one-month peak of 1.1044 seen on Wednesday to 1.0925 in the NY session yesterday. At the moment, the pair is trading around 1.0940 levels.
Focus on US data
The US advance retail sales, if horribly weak, could push the EUR/USD pair back above 1.10 levels. However, the upside could be restricted around Wednesday’s high as the horribly weak figure would not hurt Fed rate hike bets. What it could do is force the markets to think about a minor liftoff – 10bps or 12.5bps.
On the other hand, a better-than-expected number could reignite the USD rally and push the EUR/USD pair below key support at 1.0890. The Eurozone final CPI figure for November could turn out to be a non-event for the markets unless it is revised significantly higher/lower.
Technicals – Re-test of 1.10 likely above 50-DMA
- The intraday bias in the EUR/USD ran out of steam on Thursday, but bulls remain in control above 1.0890 (38.2% of 1.1495-1.0517).
- A break above 50-DMA at 1.0947 would open doors for a re-test of 1.10 (trend line resistance).
- Meanwhile, a break below 1.0890 (38.2% of 1.1495-1.0517) would expose 1.0808 (July 20 low).