Financial market research and analysis

The UK’s first quarter final growth data marks the last trading day of a very busy week for the pound. As expected, the UK’s gross domestic product expanded by 0.2% quarter-on-quarter, corresponding to an acceptable growth rate of 2.0% growth on yearly basis.

The GBPUSD eased below the 1.30 level, yet the pound is set to close the week with a meaningful positive bias.

The UK stocks remains under the pressure of a stronger pound. The FTSE 100 is preparing for the biggest weekly loss since April as the pound gained more than 320 pips throughout this week.

Numerous factors stood behind the move.

First, the Bank of England’s (BoE) Financial Stability Report revealed the bank’s intentions to use macro-prudential measures to temper the UK’s inflationary pressures. These measures include higher capital requirement for the UK lenders and a closer control on the consumer credit growth to temper the velocity of cash in the UK, hence to ease the inflationary pressures that threaten the BoE’s rate policy.

Second, Governor Mark Carney said that the MPC will discuss issues around ‘raising rates’ in the coming months and the ‘readiness to raise rates hinges on how much weaker consumption is offset by business investment’. The latter statement will inevitably increase the pound’s sensitivity on the economic data, especially on the supply side.

Finally, BoE’s chief economist Andy Haldane said that ‘interest rates policy should be set to prevent entrenched inflation’.

As a result, there has been a significant hawkish shift in the BoE rate expectations. Indeed, the probability of an interest rate hike before the end of 2017 rose to 57.5% from less than 10% two weeks earlier. Under these circumstances, pound traders have further room to price in the recent change in sentiment.

The GBPUSD traded above the 1.30 mark for the first time in more than a month. Cable extended gains to 1.3030 and gathered sufficient momentum to challenge the critical mid-term support at 1.3045, the major 38.2% retracement on post-Brexit sell-off. Surpassing this level should push the GBPUSD to the mid-term bullish consolidation zone for the first time since the Brexit referendum.


Solid US GDP failed to bring capital back to the US assets

The US’ first quarter GDP growth has been unexpectedly revised higher to 1.4%q/q annualized, versus 1.2% expected by analysts and printed a month earlier. Solid growth figure failed to drive funds to the US equities and the dollar.

The US dollar index eased to its lowest level in almost nine months, although the US 10-year yields recovered to 2.27%.

The Dow Jones and the S&P500 closed Thursday’s session 0.78% and 0.86% lower respectively. Tech stocks were again on sellers’ plate. The Dow Jones’s tech sector lead losses (-1.46%), the S&P500 techs fell by 1.83%. The NASDAQ erased 1.44%.

The US equity futures were flat in Asia.


EURUSD at 14-month high

The EURUSD advanced to 1.1445. The EUR-bulls appear determined to push the pair toward the 1 1500 mark before an eventual pause. The daily RSI (72%) indicates that the euro may have been bought too fast in a too short period of time against the US dollar. The overbought market conditions could call for a short-term correction. Support to the April – June positive trend stands at 1.1237 (minor 23.6% retrace on April – June rise) and 1.1109 (major 38.2% retrace).

The euro-area June inflation estimate will be released today. The headline inflation may have eased from 1.4% to 1.2% year-on-year in June. The core inflation is seen slightly firmer at 1.0% year-on-year versus 0.9% printed a month earlier.

A soft inflation data could set back the order among the euro-bulls which have somewhat gone beyond themselves after the European Central Bank (ECB) President Draghi spoke earlier this week. The ECB-hawks took the reins of the market, although Draghi did not hint at any form of policy normalisation. Soft inflation should help cooling down the upside pressures in the euro pre-1.15 mark.


Improved risk sentiment fuels carry traders

Chinese manufacturing and services PMI expanded faster-than-expected in June. The world’s largest emerging market recorded a better-than-expected performance in the first half of 2017, a situation which should give the authorities room to concentrate on reforms to attract more investment in its financial sector.

Shanghai’s Composite (+0.14%) outperformed its Asian peers on Friday.

Carry traders are full blast in the battle to benefit from the rate differential in times of positive risk across the market.

The AUDUSD advanced to 0.7712 and the solid positive momentum suggest a further rise to the key mid-term resistance at 0.7750/0.7800.

The NZDUSD edges higher with next positive target set at 0.7375, the 2017 high.


Interesting selling opportunity for JPY-bears

In Japan, the inflation excluding fresh food rose to 0.4% month-on-month in May, from 0.3% printed a month earlier. The unemployment rate unexpectedly deteriorated to 3.1% from 2.8% during the same month, as the industrial production contracted more than expected during the same month, by -3.3% month-on-month from +4.0% a month earlier, versus -3.0% expected.

The deterioration in Japan’s labour market, the soft industrial data, combined to low inflation certainly wet the JPY-bears’ appetite, yet the end-of-month and end-of-quarter inflows into the yen overshadowed the Bank of Japan (BoJ) doves. The latter will certainly come back in charge once the episodic capital flow is over.

Nikkei (-0.92%) and Topix (-0.75%) traded lower on stronger yen.

The USDJPY bounced back after trading at 112.92 on Thursday. Trend and momentum indicators remain comfortably positive for a second test above the 200-day moving average (111.47). There is a minor resistance at 113.07 (76.4% retrace on May – June decline) and solid resistance at 114.38/114.65 (May and March peaks respectively) before the 115.00 mark.