Market commentary and market analysis. This is really my view, sometimes…
The $GBPAUD finally staged a long overdue correction. Now what? Will the pair follow the AUD lower and resume its rally or will it follow the GBP lower?
Given the Fibonacci levels on the daily chart and the diverging RSI on the 4hr chart, it looks highly probable that the pair resumes the bull trend. However, be aware of the Carney effect.
New BoE Governor Mark Carney surprised markets today as he made his 1st move on British monetary policy. Instead of the traditional silence on monetary policy hold, Carney not only made comments but gave a full statement to introduce the markets to forward guidance.
At its meeting today, the Committee noted that the incoming data over the past couple of months had been broadly consistent with the central outlook for output growth and inflation contained in the May Report. The significant upward movement in market interest rates would, however, weigh on that outlook; in the Committee’s view, the implied rise in the expected future path of Bank Rate was not warranted by the recent developments in the domestic economy.
The latest remit letter to the MPC from the Chancellor had requested that the Committee provide an assessment, alongside its August Inflation Report, of the case for adopting some form of forward guidance, including the possible use of intermediate thresholds. This analysis would have an important bearing on the Committee’s policy discussions in August.
Not only has Carney told the market not to expect interest rate rises, he also telegraphed a possible move in policy as soon as next month. And don’t expect positive economic data to stop them either. This make the August BoE meeting even more important and all eyes have already moved towards expectations for it. We can see that already in today’s price action. Pairs that have enjoyed breakouts like the $GBPAUD, $GBPNZD, and $GBPCAD are seeing long overdue corrections. The $GBPUSD remains entrenched in its bear trend and threatens to break down to new lows. A breakout in the $EURGBP seems imminent.
But US markets are on holiday today so the reaction has actually been muted if you can believe it. Expect the real fireworks when US traders return to all this forward guidance (the ECB is announced forward guidance today as well) and the US NFP release. Happy 4th!
$GBPAUD ripped higher on the back of a AUD weakness-GBP strength double whammy. During the Asian session overnight, the Reserve Bank of Australia Governor Glenn Stevens jawboned the Aussie off a cliff. In fact, the market is now pricing in an increased 60% chance of a RBA rate cut in August. As a result, the AUD was throttled across the board allowing the $GBPAUD to rally to 1.6750. Then UK services PMI surprised to the upside and further carried the $GBPAUD to new highs at 1.6858.
With this news-induced rally, one would anticipate that the $GBPAUD would have broken to new highs on the daily chart. After all, the fundamentals just laid out should support such a breakout. The $AUDUSD certainly did break down to lows not seen in 3 years. The $GBPUSD found a bottom at new lows to break above 1.6250 resistance that had capped price all week. And yet we find the $GBPAUD struggling to take out the top at 1.6877. Perhaps the market awaits the BoE decision tomorrow. Perhaps the market will wait for the 4th of July holiday to pass. Whatever the reason, bulls should be cautious. This rally is looking exhausted with the weekly chart is still working out overbought conditions. All of which makes the $GBPAUD very toppish at these levels.
This Thursday, the Bank of England (BoE) will deliver its first interest rate decision under Mark Carney. It is widely believed that the BoE will hold monetary policy given that Carney officially stepped into office just 4 days prior. However, Carney could surprise us.
While his official start date was yesterday (July 1), Carney completed his tenure with the Bank of Canada on June 1st. So hypothetically he could have started work on the UK for 30 days already. He certainly has an opinion on British monetary policy (seen here). And the BoE has a good track record for surprising markets.
But enough with the musing. Either way Thursday’s decision goes, the $GBPUSD has resumed its bear trend. After falling to the critical long term support zone between 1.5270 and 1.5230, price fell below it to end the month of June. Bounces have been capped at 1.5250 and price has since fallen to new lows today at 1.5136. Though still in this upward channel, cable is poised to break to the next level of support at 1.5075. If price breaks lower, all eyes are the big psychological level at 1.5000. Given the respect of the Fibonacci retracement levels, cable is still on track to break to new lows below 1.4830.
This is an exciting time for sterling traders as we lay witness to the dawn of a new era. Mark Carney takes the helm today as the new Bank of England Governor. The market, as well as some top officials in the UK government, have been widely anticipating this transition since it was first announced last November. Former Governor Mervyn King has led the BoE my entire forex career. I will miss the always predictable market reaction to King’s speeches (King speaks, sell sterling) but it seems the British are ready for new monetary leadership. Though Carney has set market expectations as a GBP bear, prices will not plunge just because he steps into office. The market will size him up first with plenty of price fluctuations and positioning in anticipation of his 1st interest rate announcement and inflation report. Will the Carney Era bring sterling strength or weakness? British prosperity or recession? In 5 short years, the markets will have their verdict.