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BOE puts rate on hold but for how long?

Posted by Fullerton Markets on July 18, 2016 at 2:00 PM


Sterling rallied to the highest in July after BOE kept its rate unchanged.  Is it a good time to join the rally or sell the rally?

Brexit and BOE’s future rate decision will continue to remain in the limelight.  We have seen the development in UK leadership.  Seems like no one wants to be in the hot seat except Theresa May, who will succeed David Cameron as UK Prime Minister.  Although there is a change in leadership, but the questions remain.

“When will she invoke Article 50 to initiate the exit process?”

“How would the exit negotiations between EU and UK go?”

“When will BOE cut rate?”

Given the current situation and expected deterioration during the exit process, it is only a matter of time BOE calls for more easing measures.  In addition, BOE has discussed “a range of possible stimulus measures”, which further indicates they are on an easing mode.  We prefer to stand on the side of the central bank and look for opportunities to short Sterling.

The other major economy on the verge of more easing is none other than Japan.  Recent speculations have pushed USD/JPY back to pre-Brexit referendum level, even going beyond 106 last Friday.  Words can only do so much, if there are no follow-through actions from Shinzo Abe and his team, USD/JPY may head south on disappointment.  Even if there is any disappointment, we foresee it may be short- lived, as it is definitely not the wish of Japan Prime Minister to see the Yen strengthening too much.

Bank of Canada remains the most optimistic central bank among the G7.  It kept its rate at 0.5%, downplayed the impact from Brexit and expected a rebound in exports.  Oil prices have stabilised, provided some support for the Loonie as well.  WTI is hovering between $46-47 a barrel.

China’s GDP came in at 6.7% slightly better than the expected 6.6%, but not good enough to justify a celebration.  Market reaction is muted.  Unless there are major surprises from China, we expect its influence on the major currencies to be minimal.

For this week, we believe market will be looking out for ECB bid rate, press conference and also a string of UK data (CPI, jobs, retail sales and manufacturing PMI) to get some clues on BOE’s next move.

 

Our Picks

EUR/USD – Slightly bearish.  Any hints of further easing or rate cut by ECB is likely to push EUR/USD lower than the support around 1.1025.

FM WMR 20160718-EURUSDH4.png

 

USD/JPY – Slightly bullish.  Market is waiting for more concrete information on the expected stimulus.  Short-term inaction from Japan may result in USD/JPY heading towards 104, but we do expect some actions from Japan.  Possible to look for buying opportunity at dips.

FM WMR 20160718-USDJPYH1.png

 

Dow Jones (U30/USD) – Watch out for potential breakout.  Dow Jones is consolidating, watch out for potential breakouts around Resistance and Support.

FM WMR 20160718-U30USDH1.png

 

Top News This Week (GMT+8 time zone)

UK: CPI.  Tuesday 19th July, 4.30pm.

We expect figures to come in at 0.3% (previous figure was 0.3%).

Europe: Minimum Bid Rate.  Thursday 21st July, 7.45pm.

We expect figures to remain unchanged at 0.0% (previous figure was 0.0%).

US: Philly Fed Manufacturing Index.  Thursday 21st July, 8.30pm.

We expect figures to come in at 5.0 (previous figure was 4.7).

 

 

Fullerton Markets Research Team

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