The Bank of England voted 8-1 to leave interest rates unchanged yesterday. Sterling gained on the announcement as analysts viewed that the minutes showed that the monetary policy committee were slightly more hawkish than anticipated. The MPC downplayed events in China stating that the slowdown in the Chinese economy will have little effect on the UK. They also saw upside risks to inflation. The pound gained even though interest rate markets are still only pricing in the first hike in interest rates in the second half of 2016. Next week's inflation data due to be released on Tuesday will be very closely watched. For now though it looks likely that the Pound will remain supported.
In light of a fairly sparse data calendar today foreign exchange markets will look ahead to next weeks Federal reserve meeting. Economists are evenly split on the case for an interest rate rise. The dollar has appreciated recently amid improving economic fundamentals in the US however renewed turmoil in global markets has had some market watchers pushing back forecasts. My view is that there will be no rate rise this month although Fed Chair Janet Yellen will keep her options open to hike later on this year which should provide dollar buyers an opportunity to get in at elevated levels before the dollar inevitably strengthens.
Today may well be a range bound session as Traders pause for breath ahead of the key announcement next week. It will provide a perfect opportunity to discuss your requirements with your Halo Financial consultant as there is bound to be significant volatility around the key interest rate announcement next week.
Currency - GBP / New Zealand Dollar
The Kiwi came under renewed selling pressure this week when as the Reserve bank of New Zealand (RBNZ) cut interest rates for the third time in three months. They cut by 25 bpts which had already been priced in but they also signalled that another cut may be needed to boost inflation as growth slows. RBNZ governor stated that "At this stage , further easing in the OCR seems likely". Growth in the NZ economy is the weakest it has been in 3 years , inflation is set to remain below the 2% target and the slump in diary prices is hitting exporters hard. The NZ dollar fell sharply after the decision and is likely to remain under pressure for the foreseeable future as traders price in further easing. It’s likely that we’ll see another 25 bpt cut at the October meeting and consequently GBPNZD should remain at elevated levels for the time being. After trading down to test 2.40 this week the rate has topped out at 2.46 with a test of the recent high of 2.50 on the cards.
Currency - GBP / Australian Dollar
A reasonably flat week for GBPAUD, it’s been consolidating around 2.20, unable to make headway after disappointing UK economic data weighed on the pound at the start of the week. The uptrend it still intact however, with the prices holding above the 20 day moving average. (the red line on the main chart which has been a good indicator of the uptrend only breaking below that line for a couple of weeks in August. Next Tuesday the release of the RBA’s minutes from the most recent interest rate meeting will be very closely watched. If they suggest that further interest rate cuts are on the horizon we should see the Aussie weaken again . Today Goldman Sachs put out a report saying they are expecting 2 more interest rate cuts from the RBA into next year as they struggle to stimulate growth, inflation and counter headwinds from the Chinese economic slowdown. Limit orders are useful and targeting 2.20 with a stop loss order at 2.15 would be my short term recommendation.
Currency - GBP / Euro
For once, we saw a relatively quiet week for the Euro. The single currency held its ground in relatively tight ranges against the dollar and the pound as markets prepare for the FED meeting next week. GBPEUR traded a low of 1.3594 and a high of 1.3806 this week and held steady as EU GDP came in slightly better than expected, recording a figure of 0.1% above expectation. German inflation data released this morning, came in line with expectation and set the tone for a tight range against major counterparts, as we go into the weekend. Looking forward to next week, the Eurozone release industrial production data on Monday morning. Focus then turns to EU inflation data on Wednesday morning although any move, could be eclipsed by the FED if there are any surprises when they meet on Thursday.
Currency - GBP / US Dollar
The rebound from 1.5164 has extended further throughout the week. This looks to suggest that the low after the turmoil caused by the Chinese Stock market collapse has been completed. That being said Sterling has been able to break through the weekly moving average over the past couple of days so a break above 1.5440 will be needed to affirm this correction.
All eyes will be on the USD rate in the lead up to the FOMC rate decision on Thursday evening. There has been much speculation that September would finally be the month that after 6 and a half years the FED would raise rates. A pessimistic inflation outlook and the wild events in China have ensured that most now see it as unlikely that the FED will raise rates but it is the tone in the accompanying statement which will keep the market interested.
1.5550 remains a pivotal level of resistance keeping the pound in check. Converseley , if the 1.5160 level is broken that should signal a move south, down to the lows seen in April. It is still uncertain what kind of momentum the FED statement will create on Thursday so USD sellers/buyers should look to have orders in place to be prepared.