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BoE’s inaction boosts GBP, JPY slides further, Fed Lockhart upholds his two-rate hike view

- In our view, the BoE's wait-and-see approach is completely appropriate, especially given the uncertain outlook on the UK’s future relationship with the EU

- GBPUSD resistance at 1.3534 will be hard to pass in absence of significant political developments

- Chinese growth figure misled by government investments

- EURUSD may hit soon resistance at 1.1186

- JPY on the downside as traders continue closing short speculative positions amid signs that Abe will boost stimulus plan 

- USD should resume its rally in the event of solid CPI today


Yesterday, the FX market reacted nervously to the BoE decision to keep interest rates unchanged at 0.50%. Indeed, most economists were expecting the central bank to have anticipated the negative effects of the Brexit. Their decision denotes a hesitancy to commit to any major moves before first gaining more clarity on the actual situation and its effects on the UK economy. This wait-and-see approach is completely appropriate, especially given the fact that the UK’s future relationship with the EU remains so unclear. The BoE will continue to wait for the smoke to clear before pushing the panic button. GBP/USD continued to push to the upside as it reached 1.3481 in Tokyo before edging down to 1.3430. However, in the absence of significant developments on the political side, the strong resistance at 1.3534 will be hard to pass.

The US dollar weakened slightly in the early Asian trading in reaction to better-than-expected Chinese growth figures. However, the hype was proven to be short-lived as the details showed the Chinese economy was being kept afloat by the government, while private investment continued to free fall during the first half of the year. GDP grew 6.7%y/y in the second quarter (versus 6.6% expected and 6.7% previous), which is good news for the 2016 target of 6.5%y/y. However, private investments continued to slide and rose 2.8%y/y in June versus 3.9% in May and 5.2% in April, while state investment surged 23.5%y/y, versus 23.3% in May and 23.7% in April. Obviously, deleveraging is not yet a priority.

EUR/USD reversed early session gains and returned to its initial level at around 1.1120. On the short-term, the pair is still trading within its uptrend channel but will hit soon the resistance that lies at 1.1186 (high from July 5th).

USD/JPY fell another 0.50% on Friday and is about to print a weekly gain of 6%! This quick and massive collapse of the Japanese yen against the US dollar is mostly due to traders closing their short positions - CFTC data indicated that speculative short positions in USD/JPY reached 42% in the week ending July 5 - on speculation that Prime Minister Shinzo Abe would boost the stimulus plan. In addition, improvements in the risk environment have also helped to reduce the demand for safe haven assets such as the yen.

A new batch of economic indicators from the US is due for release today. Headline CPI is expected to come in at 1.1%y/y in June after rising 1.0% in the previous month, while the core gauge should have remained stable in June at 2.2%. According to the latest survey, June retail sales should ease to +0.1%m/m in June versus +0.5% in May, while the gauge, excluding autos and gas, is expected to remain stable at +0.3%m/m. In the event of solid CPI and retail sales prints, the USD could resume its rally on renewed Fed rate hike expectations.

Yann Quelenn, market analyst: “Fed Lockhart upholds his two-rate hike view: What exactly is the Atlanta Fed President trying to do? Yesterday he stated that two rate hikes are still possible this year. However, when questioned on their inaction, Fed policymakers blame the cold winter, the oil prices turmoil and now the Brexit for causing too much uncertainty. Markets are beginning to really question the credibility of the central bank, pricing in the possibility of a rate cut by the end of 2017 (even though this remains unlikely at the moment).

In our view, it is clear that there will be no rate hike this year. US data is way too mixed, inflation is far from the 2% target and labour data, which has been a good point over the last few years is starting to provide some concerning signals, such as the recently volatile NFPs. The US is clearly not ready to increase rates and the global outlook is buying some time for Fed policymakers. The dollar should still be driven on Fed rates’ expectations and therefore suffer from the Fed’s inaction.” ---

Friday, 15 Jul, 2016 / 8:46

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