AC: Mid-Day Report: Sterling Pared Losses after BoE Minutes
Sterling pared back some losses today after release of BoE minutes. Delivering little surprise, the BOE minutes for the May showed that policymakers voted unanimously to leave the Bank rate at 0.5% and the asset purchase program at 375B pound. Martin Weale and Ian McCafferty continued to judge that it's finely balanced between keeping rates on hold and raising them. They voted for rate hikes in late 2014 but have been voting for maintaining the status quo since January as inflation softened. While anticipating that inflation would remain close to zero in the very near term, the members warned of the upside risks in house prices in the second half of the year. More in BOE Minutes Warned Of Upside Risks In Housing Market.
Euro remains the weakest major currency this week. The common currency was pressured as ECB executive board member said the central bank would buy more assets than previously planned in May and June. That was mainly due to "seasonal patterns" in fixed income market activities and traditional holiday period in mid-July to August. Thus, ECB would front-load its purchase activities in May. ECB governing council member Ewald Nowotny said yesterday that "we should certainly expect a longer phase of low interest rates". Released from Europe, German PPI rose 0.1% mom, dropped -1.5% yoy in April. Swiss ZEW improved to -0.1 in May.
Stronger than expected GDP data from Japan lifted Nikkei and sends the yen lower broadly. Q1 GDP rose 0.6% qoq versus expectation of 0.4% qoq, and compared to prior quarter's 0.4% qoq. The annualized growth rate was 2.4% versus consensus of 1.5%. GDP deflator rose 3.4% yoy versus expectation of 3.6% but was much higher than prior 2.4% yoy. While the headline numbers were solid, some economists noted that the details weren't as promising. It's noted that private inventories contributed an outsized 0.5% to GDP. And stripping that out, the economy barely grew. There are speculations that BoJ would still need to ease monetary policy further to hit the 2% inflation target by mid-2016. Economics Minister Akira Amari noted that, "in terms of sentiment, Japan hasn't emerged from deflation yet".
The FOMC minutes will be the next focus. They might probably show that policymakers stayed confidence in reaching the 2% inflation target in medium term. There are talks that Fed's communications, including the FOMC minutes, would remain vague regarding the timing of the first rate hike. While June hike is basically ruled out, there are doubts on whether Fed would hike in September and that's subject to the performance of the economy in Q2. And the attention would be on how confident are policymakers regarding to the chance of a rebound in Q2.
Intraday bias in GBP/USD remains neutral for consolidation below 1.5814 temporary top. We'd expect strong support from 1.5088/5496 to contain downside and bring another rally. Above 1.5814 will target 61.8% retracement of 1.7190 to 1.4565 at 1.6187. At this point, we're slightly favoring that the rebound from 1.4565 as a correction. Thus, break of 1.5088 will indicate that such rebound is completed and turn focus back to 1.4565 low.
In the bigger picture, current development argues that medium term fall from 1.7190 might have completed 1.4565. Focus in on whether rebound from 1.4565 is a correction to fall from 1.7190, or another leg inside the consolidation pattern from 1.3503 low. We'll assess the outlook at a later stage based on the structure of the rebound. But in either case, the long term down trend from 2.1161 is still expected to extend for a new low below 1.3503 later.
