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by Charalambos Pissouros

BoE Keeps Rates Unchanged, but Haldane Joins the Dissenters; OPEC Meeting in the Limelight

 Oil 05

GBP Rallies as Haldane Joins McCafferty and Saunders

The pound traded higher against all but two of the other G10 currencies on Thursday. The currencies it outperformed the most were USD, CAD and SEK in that order, while it ended the day fractionally lower versus NOK and NZD.

GBP perf 220618

The Norwegian Krone was among the gainers as it skyrocketed following the Norges Bank decision. Although the Bank kept interest rates unchanged as was widely expected, officials noted that “the key policy rate will most likely be raised in September 2018”, a much clearer line compared to the “after summer” that was included in the previous statement.

The SNB kept interest rates as well, reiterating that it remains prepared to intervene in the FX market if needed and that CHF remains highly valued. The Bank upgraded its inflation forecasts for this year but downgraded its 2020 ones to +1.6% yoy from +1.9% previously.

Yesterday, the big event for pound traders was the BoE policy decision. The Bank decided to keep interest rates unchanged at 0.5% but via a 6-3 vote instead of a 7-2 as the market consensus suggested. The policymaker who joined the ultra-hawks Ian McCafferty and Michael Saunders in voting in favor of a rate increase at this gathering was the Bank’s Chief Economist Andy Haldane.

What’s more, the minutes accompanying the decision revealed that the Committee’s assessment was that data released since the May meeting were consistent with their view that the slowdown in Q1 was temporary. They still expect a +0.4% GDP growth in Q2. Another point of interest is that the Bank also decided to change its guidance on when it will consider reducing its stock of debt purchased under its QE program. The previous guidance was that the stock will not be reduced until the rate reaches 2%, but they now cut that to 1.5%.

The pound came under strong buying interest at the time of the decision as all the above, combined with Theresa May’s critical victory in parliament on Wednesday, encouraged investors to increase their bets with regards to an August rate increase. That said, the majority of policymakers said that there was value in seeing how the data evolved from here. So, having that in mind, we will continue monitoring closely how upcoming data unfolds before we better assess whether the Bank will indeed proceed with raising interest rates in August. Remember that a month ahead of the May meeting, market participants were almost certain that the Bank would hike at that gathering, but a string of disappointing data and dovish remarks by Governor Carney wiped out their expectations, with the Bank eventually keeping its hands off the hiking button.

GBP/CAD – Technical Outlook

Yesterday we saw the British Pound getting boosted by the BoE vote change and GBP went up against the majority of its G10 counterparts. After the BoE announcement came out, GBP/CAD shot up by around 100 pips in a matter of 5 minutes. The pair continues to hold on to its upside support line drawn from the lows of the 31st of May and is currently trading above it. GBP/CAD is looking positive, but we should not forget that, looking at the bigger picture, the pair is still below its long-term upwards moving trendline taken from the low of 8th of September last year. This could mean that the up-move, which we are seeing right now, could be just a correction.

For now, until we see a break of the aforementioned support line, we will stick to the upside potential and aim for higher levels. A break through yesterday’s highs at around 1.7660 could trigger some more buying activity and GBP/CAD could make its way towards the 1.7755 zone. Slightly above that, there is another potential good area of resistance at around 1.7810 level, which could slowdown the rate from rising. Certainly, we could see a bit of retracement to the downside, towards the 1.7575 support line, from which the pair could bounce back up and aim for previously mentioned levels.

It also looks like that our oscillators, the RSI and the MACD, are also somewhat in favour of the upside. The RSI is above 50, a bit flat, but looks like it could move towards the 80 mark. The MACD is way above both its 0 and trigger lines, with the signs of potentially aiming higher.

Alternatively, if GBP/CAD starts dropping heavily and breaks the 1.7550 mark, then the pair could travel all the way towards the previously mentioned support line for a quick test. If GBP/CAD gets to that line, we will have to monitor that area carefully, as a potential break of it could place the bears into the driver’s seat and they could start pushing the pair down to the next key area of support at around the 1.7315 level.

2018.06.22 GBPCAD 240 Logo

OPEC Pushes for Raising Output, but Iran Continues to Resist

Today, oil traders will be sitting on the edge of their seats in anticipation of the gathering between OPEC and major non-OPEC oil ministers in Vienna. Back in late 2016, OPEC, Russia, and several other non-OPEC producers agreed to cut output by 1.8 million bpd starting from January 2017, in an effort to support oil prices, which have fallen notably due to global oversupply and increasing US shale production.

At their latest gathering in November, members have agreed to extend the cuts until the end of 2018, but headlines since late May suggest that Saudi Arabia and Russia are in favor of loosening the cuts now in order to deal with supply shortfalls from Venezuela and the effect of the renewed sanctions imposed by the US to Iran.

Iran, Iraq and Venezuela have opposed such a decision, but yesterday’s headlines suggested that a production rise of about 1mn barrels per day was a near-consensus proposal, with only Iran still resisting. “I don’t think we can reach agreement”, the Iranian Oil Minister said yesterday after leaving a joint OPEC and non-OPEC ministerial committee. 

Oil prices have recently been in a sliding mode on speculation that the meeting could end up with a deal of loosening the previously agreed cuts. So, if Iran gives in and agrees with the others, the resulting market response may depend on the amount members will decide to return back into the market.

For the oil to tumble further, we believe that the number has to be higher than the 1mn bpd suggested by yesterday’s almost consensus proposal. If they just decide to proceed with 1mn, oil could slide on Iran’s compromise, but not much. As we already noted, the case for loosening the cuts appears to be mostly priced in.

On the other hand, a compromise deal of a much smaller number could prove supportive for the black liquid. Remember that on Monday, oil rebounded on reports that a number of members were supporting an increase of 300-600k bpd.

Now, in case no deal is reached, and members stick to the November accord, oil prices could skyrocket, but it will be interesting to see whether Saudi Arabia and Russia will proceed with increasing their output without wider backing.

WTI – Technical Outlook

WTI oil continues to trade below the mid-term upwards moving trendline, drawn from the lows of the 31st of August last year. This could be seen as bearish sign for now, but one should not forget that today’s OPEC meeting could bring volatility into this commodity and we could see some big moves. We prefer to take the neutral position for now and keep monitoring the key levels.

As mentioned above, WTI oil is still below the aforementioned mid-term trendline, which could continue acting as a good area of resistance. If the commodity starts selling off again and the price starts breaking the 65.75 zone, then we could start targeting the 64.20 mark. After that, the “black gold” could continue falling towards the Monday’s lows at around 63.30 level. A break lower could open the door for a test of the 61.80 zone, where slightly below that, runs the longer-term upwards moving trendline, taken from the 21st of June 2017, which could potentially slowdown the price from dropping.

On the other hand, a strong push up through the 66.85 level and a break back above the mid-term upwards moving trendline could interest more bulls to join in the action and drive WTI towards the 68.70 level. If that level does not hold, then a move above it could open the path towards the 70.45 area.

2018.06.22 WTI 240 Logo

As for the Rest of Today’s Events

During the European day, we get the preliminary manufacturing and services PMIs for June from several European nations and the Eurozone as a whole. Expectations are for both the Euro area manufacturing and services PMIs to have continued to slide, to 55.0 and 53.7 from 55.5 and 53.8 respectively. This is likely to drive the composite index down to 53.9 from 54.1.

EZ PMIs 220618

At last week’s ECB policy meeting, officials signaled a QE-tapering after September and a clear end to the program in December, but the decision was subject to incoming data. What’s more, they noted that interest rates are expected to stay untouched “at least through the summer of 2019 and in any case for as long as necessary”, which came as a disappointment to those expecting a hike in mid-2019.

Thus, further declines in the PMIs would suggest that the economic slowdown observed since the start of the year still continues, which could prompt investors to push further back their rate-hike expectations.

We get preliminary June Markit manufacturing and services PMIs from the US as well, and expectations are for these PMIs to have also declined. However, as far as the US is concerned, the market tends to pay more attention to the ISM indices, due out on the 2nd and 5th of July respectively.

In Canada, CPIs for May and retail sales for April will be closely watched by investors in order to assess how likely a July hike by the BoC is. Expectations are for the headline CPI rate to have risen to +2.5% yoy from +2.2%, but the core rate is forecast to have ticked down to +1.4% yoy from 1.5% yoy. As for retail sales, headline sales are anticipated to have slowed to +0.1% mom in April from +0.6% in March, while core sales are expected to have risen 0.5% mom after sliding 0.2%.

 

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