Bank Of England "Super Thursday"
Swissquote Bank Ltd | Nov 03, 2016 08:22AM ET
Forex News and Events
GBP can still recover
Traders should expect a big day for GBP. In an uncertain event, the UK high court will issue a ruling on whether the government releases Article 50 without the consent of parliament. Should the government lose its case, we would see a decent GBP bounce give the extensive short position. However, should they win, an appeal is clearly on the table for which the Supreme court has provided a hearing time on December 7th-8th.
Regardless of the outcome, this legal appeal clearly provides additional uncertainty to what is already an extremely cloudy and complex situation. In regards to the BoE this will be the most complete set of data since Brexit. We anticipate that the BoE will remain on hold as economic data remains firm despite the skeptics. Markets will be interested in the Quarterly Inflation Reports upward revision in inflation and growth which were both projected to evaporate after Brexit.
GBP has rallied in recent days in expectation of a strong UK and the probability of further policy actions has decreased, triggering a sharp sell-off in gilts. We continue to see short term GBP buying opportunities as the politically-driven Brexit story continues to capture headlines but lacks tangible results.
Fed must strike in December
As widely expected by financial markets, the Fed has not moved its rate and monetary policy will remain unchanged until the December meeting. For now, the likelihood of a rate hike stands at 75%. Last year’s scenario is going to be played out again when the rate hike was also postponed until December.
Economic data is not the Fed’s main driving force. If they do deliver before year-end, then this action will be purely driven by a question of credibility. If it fails to do so, the stock market may experience a more abrupt sell-off.
From a data standpoint, this week is far from over. The non-farm payrolls are due for release on Friday afternoon and this data will still be important to assess the true state of the US economy. One first element is that the ADP jobs report which were issued yesterday proved a disappointment with 145k jobs versus an165k expected from economists. A change in NFPs is expected at 175k tomorrow.
Also of interest at present, is how stock markets are pricing in a higher likelihood of a Trump win. Hillary Clinton is definitely losing ground due to renewed controversy and the S&P is having its longest losing streak in five years. The index also closed below 2100 for the first time in four months. Though many question whether Trump would reduce the power of the Fed in the event of his election, we believe that the Fed would indeed keep its decision-making power.
For the time being, the US central bank is far from running out of ammunition and while it sounds ironic, the Fed might very well increase rates slightly to save its credibility and launch a new QE to support growth.
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In our view, there won’t be any rate hike in 2017, but the demand for the dollar is going to increase on the back of rising hopes that monetary policy will be normalized. Moreover, it is clear that the Fed is pushing for inflation and will allow the spread between real interest rates and nominal interest rates to widen in an effort to kill the country’s massive debt.
The Risk Today
EUR/USD keeps pushing higher. Strong resistance at 1.1058 (13/10/2016 high) has been broken. Key resistance is located far away at 1.1352 (18/08/2016 high). The technical structure suggests further strengthening. In the longer term, the technical structure favours a very long-term bearish bias as long as resistance at 1.1714 (24/08/2015 high) holds. The pair is trading in range since the start of 2015. Strong support is given at 1.0458 (16/03/2015 low). However, the current technical structure since last December implies a gradual increase.
GBP/USD's short-term momentum is bullish. Hourly support is given at 1.2083 (25/10/2016 low) while hourly resistance at 1.2329 (11/10/2016 high) has been broken. Yet, strong resistance stands far away at 1.2620 then 1.2873 (03/10/2016). Expected to further consolidate around at 1.2329. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY's momentum is turning negative. Hourly support at 102.81 (10/10/2016 low) has been broken. Hourly resistance is given at 105.53 (28/10/2016). Next key resistance lies at 107.49 (21/07/2016 high). Key support can be found at 100.09 (27/09/2016). Expected to further decline. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF is way into a bearish momentum which starts to fade above 0.9700. Strong support lies at 0.9632 (26/08/2016 base low) while resistance area is given around the parity. Expected to monitor support at 0.9632. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
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