The USD is trading mixed to slightly firmer versus the major currencies overall as the DXY consolidates recent gains. Markets are ending the week a little more defensively overall, with European stocks and US equity futures softening while major bond markets are better supported, dragging yields down 1-2bps (Gilts are utperforming after the BoE’s dovish hike). Crude remains firm, owever, while copper and iron ore prices are also advancing, helping commodity FX outperform modestly. Nickel traded limit down on the LME as the faltering restart to trading there continues. Developments in Ukraine remain a focus for markets and perhaps grounds for today’s cautious tone; Putin told Germany that Ukraine was trying to stall negotiations while Biden and Xi will speak later today. An early end to the conflict seems unlikely and US officials warned that Russia could still escalate if the war drags on. Markets may have become too sanguine on developments. The BoJ left policy on hold earlier today (as expected). BoJ Gov. Kuroda said there was “absolutely no need” to raise rates (while warning that inflation could pick up to 2% in April) and said a weaker JPY is positive for the economy overall, lifting the USD from the mid-118s. The US releases Existing Home Sales and Leading Indicators this morning but there will be more interest in today’s Fed speakers who have been released from their quiet period following the FOMC decision; there are three on tap today (Kashkari, Barkin and Bowman) and a lot more (including Chmn Powell) next week. We look for the USD to remain broadly better supported versus the lower yielders as the Fed pushes on with its tightening.
The GBP is posting a minor loss on the day, extending yesterday’s losses following the BoE’s announcement amid limited domestic developments overnight. The BoE’s decision has taken the spread of 2-yr gilts versus UST yields to - 70bps today from only about -15bps one month ago. Yesterday’s dovish hike saw the GBP drop over 100 pips upon announcement into the high 1.30s before broad lossesin the USD helped the pound to a minor gain for the day. Not only did none of the BoE officials vote for a large hike, but there was one who voted for a pause (Cunliffe, new top dove over Tenreyro?). The bank’s minutes also suggested an elevated degree of caution given the “squeeze on real household disposable incomes […] consistent with a weaker outlook for growth and employment.” Despite what we think is a very clear signal from the BoE that a pause in rate hikes may lie ahead and that it is unlikely to meet aggressive market expectations (“further modest tightening […] might be appropriate in the coming months”), OIS pricing still sees another four to five 25bps hikes to 2% by year-end. Our bank forecast only sees two more hikes from the BoE this year—with the possibility of one more—but we think it’s highly unlikely that the Bank raises rates to 2% by year-end. At least markets have moved away from pricing in a 50bps hike at one of the remaining 2022 meetings, and year-end pricing has fallen by almost 30bps since Wednesday, with the GBP set to remain on the backfoot as further rate hike bets get taken out. Steep inflation that may reach double digits in autumn may motivate markets to maintain some of these bets, but a cost-of-living crisis that depresses growth and employment will keep the BoE from hiking excessively—so we foresee more downside in the pound toward 1.30, initially.
Speeches from Bailey (neutral), Cunliffe (dove), and Mann (hawkish) next week as well as Sunak’s Budget Announcement (where he may roll out measures to help household finances) are the main domestic risks for the GBP.
GBPUSD short-term technicals: Neutral/bearish—Cable’s sharp moves yesterday that saw it fall from a break above 1.32 to a break under 1.31 to then close at the midfigure zone were followed by steadier trading overnight before drifting lower ahead of our session. The GBP’s short-lived uptrend from its test of 1.30 on Monday has lost momentum and price action over the past ~24hours points to the GBP’s decline on the day extending to a test of 1.31. Resistance after the mid-1.31s is 1.3175/85 followed by 1.3200/15. I still have nine trading days left and I have already profited 4.68% in March alone, my optimism only increases considering the high upgrade in the MQL5 ranking, if you want to know more about my profits click here.
