This guest article was written by Ashwin Peswani who is the Regional Director of .
Unlike its July meeting, the Bank of England (BoE) was forced to announce what the Governor termed as an “exceptional” stimulus on so called “Super Thursday”. However, except for the GBP, and to some extent the EUR, the rest of the currencies could only reflect a surprise addition in QE with little change as the rate-cut was already expected.
Following the decision, the GBP registered a -1.6% plunge against its US counterpart, the most since early July, and dropped -1.5% as compared to the Euro. The pound also nursed some of its losses on Friday when investors were switching their focus on the crucial US Non-farm Payrolls (NFP), which could indicate whether the Fed can go ahead with its planned rate-hike in 2016 or not. Let’s quickly examine both these events.
The BoE’s Stimulus & Quarterly Inflation Report (QIR)
Ever since the UK decided to leave the European Union (EU) after its four decade old relationship on June 24, the central bank (BoE) has been eagerly watched to announce a large stimulus to safeguard the British economy. The so-called “Brexit” was followed by a dip in headline PMIs and Retail Sales, the main force of the UK economy; though, the BoE Governor, Mark Carney, asked for some time to evaluate the incoming data-flows before announcing any stimulus during July meeting. The market remained frustrated and shifted their eyes on the August 04 meeting, which was also accompanying QIR release.
On Thursday, the BoE, left with no option and announced the already expected 0.25% rate-cut to its 0.5% Official Bank Rate, the first slash since 2009. However, the surprise component was the 60 Billion Pound addition to its QE measures, which now stands at 435 billion Pounds. Additionally, the QIR also reflected pessimism as policymakers now expected a dip in GDP and a higher Unemployment-rate during the years to come.
As per the projections, unemployment rate were slated to rise from 4.9% in May to 5.6% over the next two years, while the GDP will continue facing hurdles during 2017 and 2018 by printing 0.8% and 1.8% growth figures against 2.3% predicted earlier. Further, the CPI had an upbeat forecast to gain slowly and surpass the 2.0% target by Q3 2018 with 2.4% mark against 2.1% expected in May.
Following the decision, the Governor came to answer the press and he sound too disappointed with the present and the near-future UK economics. Though, he maintained his strength and joined the Federal Reserve league by arguing against the negative interest-rate policy.
Hence, an unexpected increase in QE and pessimistic forecasts concerning GDP and unemployment dragged the GBP down on “Super Thursday” but the same might not prevail for long as the BoE Governor sound a bit positive and any improvement in upcoming data-points can help the Pound pare some of its recent losses.
The Second Inning: US Jobs Report
As Friday trading gets started across the market, traders are curious about how July employment figures from the US would reflect the strength of world’s largest economy. During previous month readings, the NFP rallied to six month’s high of 287K and pared its previously weaker print of revised down 11K while the unemployment rate rose to 4.9% from 4.7% and Average Hourly Earnings grew 0.1% from 0.2% prior.
After the release, the FOMC meeting, during late-July, refrained from signaling any slues relating to its rate-hike plan for 2016 and said to observe incoming data-flow closely before announcing any such actions as the risk from Brexit keep flashing red signals. However, the policymakers didn’t rule out the chances of a rate increase in 2016 and hence keep inflating the importance of such headline numbers as scheduled for publish on August 05.
Looking at the consensus, the NFP might print a normalized figure of 180K, near to its first six-month’s average and the Unemployment rate is also expected to have softened to 4.8% with the Earnings moving back to 0.2% growth.
Even with a soft NFP number, an improvement in rest of the figures might continue favoring the chances of the first rate-hike in 2016 which in-turn can inflate the US Dollar gains. However, an extensive dip below 170K by the NFP, or even below 100K, could raise the bars for the US central banker in announcing the eagerly awaited rate-lift and can drag the greenback further towards south.
Chart Speaks
Technically, the GBP/USD broke its short-term symmetrical triangle formation, as can be seen in the aforementioned chart, and is indicating an extended downside to 1.3045 before testing the 1.2965-60 support-zone, breaking which the 1.2800 round figure might act as intermediate halt before the pair can plunge to June 1985 lows of 1.2615.
Alternatively, the support-turned-resistance-line, around 1.3200 and the 1.3275 are likely immediate resistances that the pair needs to confront prior to visiting the 23.6% Fibonacci Retracement of its June – July plunge, at 1.3320. Though, pair’s additional upside beyond 1.3320 might be confined by the descending trend-line resistance of 1.3360, which if broken enables the pair to aim for 1.3480 and the 1.3535-40 upside numbers.
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