Financial market research and analysis

The Bank of England (BoE) policy decision and the Quarterly Inflation Report (QIR) are the major macro events of the day. The BoE is expected to maintain its monetary policy unchanged, to revise its inflation forecast higher due to the significant pound depreciation posterior to the Brexit, yet to remain cautious regarding growth due to looming Brexit risks.

Traders will be watching the 1.30 level, which has acted like a solid resistance so far. It could be a make or break day for Cable.

Most frequently asked question is: Will Cable appreciate past 1.30?

The pound appreciated by nearly 3.80% against the greenback since PM Theresa May announced on April 18 that the UK will hold an early general election in June. The GBP-bulls continue betting that the early election could curb the extremes views in the Parliament, such as UKIP, set aside a part of the hardest Brexiteers and allow the UK to negotiate a smoother Brexit.

On the flip side, the divergence between the Fed, seeking to raise rates and shrink balance sheet simultaneously, and the BoE, hoping to stay as accommodative as possible despite the rising inflationary pressures, is in favour of a relatively stronger US dollar. The key resistance is eyed at 1.3044, the major 38.2% retracement on post-Brexit sell-off. A break above this level should suggest a mid-term bullish reversal in GBPUSD.

It is of course possible for the pound to extend gains above this level, should traders are ready to start unwinding their negative view due to the Brexit.

What could be that extra push for the pound bulls?

Rising inflationary pressures have encouraged Kristen Forbes to vote in favour of an interest rate hike at the latest MPC meeting.

The headline inflation in Britain rose to 2.3% year-on-year in March, highest since September 2013. Yet, the core inflation, excluding food and energy, eased to 1.8% from 2% printed a month earlier. Provided the recent fall in energy prices, a temporary pause in the headline inflation could be reasonable, and refrain the remaining MPC members from joining the hawk’s club this week.

The MPC is expected to vote 9-1 in favour of stable BoE rates. A more hawkish vote count could revive the BoE-hawks and could be the extra push needed for a pound appreciation above $1.30, yet will certainly not change the overall dovish outlook. The market assesses less than 60% probability for a rate hike to happen before the end of 2018.

Large call options are seen at 1.2960 and 1.3000 at today’s expiry. Failure to break above the 1.3000/1.3050 area could trigger a downside correction and encourage Cable to end the week below the 1.29 mark.

Gains in FTSE remained capped at 7380p at today’s open. The strong pound and the $1.30 taboo abstain buyers from entering fresh positions before the QIR.

WTI crude tests $48 offers

According to the EIA data, the US oil inventories dropped by 5.2 million barrels last week, more than -2 million expected. WTI hit the $48.78 target (major 38.2% retracement on April – May decline) and topped pre-$48.

Trend and momentum indicators remain positive, and rising speculations that the OPEC would announce further measures to reduce the global supply glut in May 25 meeting keep buyers alert. Surpassing the $48 could encourage a further rise toward the $50 level.

FTSE’s energy stocks (-0.11%) are slightly downbeat in London.

Euro risks short-term bearish reversal versus US dollar

The EURUSD eased to 1.0853 on Wednesday, a touch higher that the critical short-term support of 1.0849 (major 38.2% retracement on April – May rise), as the European Central Bank President Mario Draghi said that it may be too early to declare victory, despite the solid Eurozone economic.

Breaking below 1.0849 should suggest a short-term bearish reversal in EURUSD and could encourage a deeper downside correction to 1.0795 (50% retrace) and 1.0760 (200-day moving average).

NZD tanks on Wheeler’s dovish comments

As expected, the Reserve Bank of New Zealand (RBNZ) maintained its official cash rate unchanged at 1.75%. The kiwi (-1.67%) has been the biggest loser against the US dollar after the RBNZ Governor Wheeler said he doesn’t see a ‘burst of inflation’ and expects the cash rate to remain unchanged at 1.75% in the foreseeable future.

The NZDUSD tanked to the lowest level since June 2016. The 0.68 level is the next natural target for the NZD-bears, especially as the US dollar is trading under a rising hawkish pressure.

Rosengren suggests to start unwinding the balance sheet following next rate hike

Boston Federal Reserve’s (Fed) Rosengren called for three more interest rate hikes this year and suggested to start shrinking the balance sheet following the next rate hike. We remind that the market assesses 100% probability for a June rate hike.

The US dollar is well bid across the board, although traders analyze Rosengren’s suggestions with caution. Rosengren appears to be very hawkish and will likely lack support for such an early portfolio shrinking.

The US 10-year yields stand just below the 2.40% level.

The US stocks consolidate gains. The S&P500 outperformed the Dow Jones since Monday. Although the recent appetite appears to be limited pre-21’000 level, the Dow Jones stocks have performed relatively better than their S&P peers since November.

The Dow is called 23 points softer at $20’920 at the open. The S&P500 is expected to kick-off 4 points lower at $2’395.

USDJPY on the rise toward 115.00

The JPY-bears benefit from higher US yields. The USDJPY hit a two-month high (114.37). Short-term trend and momentum indicators hint at a further rise. Intermediate resistance is eyed at 114.60 (major 61.8% retracement on December – April decline), before the 115.00 mark.

There is a large call option expiry at 114.00 for today. More call options are waiting to be exercised at 115.00/115.20, suggesting that the option positions do not represent a barrier at the 115.00 level.