BCB in spotlight, weak PMIs from UK

Forex News and Events

BCB to release interest rate decision (by Arnaud Masset)

Later this evening the BCB will release it interest rate decision. According to the latest survey, market participants expect the Selic rate to remain unchanged at 14.25% as inflation expectations start to anchor around 5.50% for 2016. Even though the BCB’s target of 4.5% will be missed in 2016, the market still believes that the Central Bank is committed to bring inflation toward this level.

We think the Central bank has done its job so far and that any additional increase of the Selic will have a higher marginal cost for the economy in terms of growth and unemployment level. Now it is the turn of the politicians to do their job and to get the country back on track. The congress has to find new sources of revenue and to cut expenses to address the fiscal deficit. This situation is not sustainable over the long term and the more it lasts, the bigger the damages. USD/BRL rose almost 40% since the beginning of the year as it reached 3.70 yesterday - the highest level since December 2002 - and we see no reason for the real to continue depreciating.

IMF: Lagarde says global growth is at risk (by Yann Quelenn)

In Jakarta, Christine Lagarde, the International Monetary Fund Manager held a public lecture at the University of Indonesia in Jakarta. She has given her view on the global market outlook and she mentioned the current China’s weakness can spill over to the rest of the world. Indeed, China is shifting to a more market-oriented economy. The mainland has also started to get rid of its U.S. Treasury Bonds, only a few weeks after the debasement of its own currency. China is now ready for the yuan to float with the market. In addition, we think that the PBoC is trying to force the IMF to accept the yuan as one of the world’s reserve currencies. China’s weakness also weighs on emerging market economies especially in Latin America. Lagarde concluded that the global growth outlook is weaker than IMF July forecast.

Mixed data from UK (by Peter Rosenstreich)

We have an extremely bullish call on the GBPUSD year-end price (1.62) so yesterday’s clear break below the 200d MA was concerning. The direct catalyst was disappointment over the manufacturing PMI index that slipped to 51.5 from 51.9 rather than rising to 52.0 (traders were less concerned over US ISM downside surprise). Therefore positive economic data would help ease our downside concern. However, UK construction PMI was mixed coming in at 57.3, below expectations of 57.5 but above prior read of 57.1 in July. The slight increase was the supported by sentiment and output growth which have decelerated but still stands at elevated levels. Not a huge positive adjustment but perhaps enough to keep GBPUSD consolidating above retracement level at 1.5250 (initial reaction was minor selling of GBPUSD). Our bullish view remains that the market is underestimated the strength of the UK economy and misjudging the BoE inflation fighting intentions. BoE Governor Caney sounded relatively optimistic at Jackson Hole shrugging off downside risk to the global economy. Noting, China’s troubles could “impart further imported disinflationary pressures over the policy horizon,” however, “developments in China are unlikely to change the process of rate increases.” This suggests that the BoE is likely on a path for rate hikes in early 2016 should the economy remain strong. A higher conviction level regarding the BoEs rate path would give the oversold GBP the kick were are looking for.

EURGBP - Pushing Higher