The Big Picture

How dovish the BoE really is Bank of England Governor Mark Carney, Deputy Governor for Financial Stability Jon Cunliffe, monetary policy member Kristin Forbes and one of the dissenting voters, Ian McCafferty testify to the Parliament’s Treasury Select Committee over their latest economic forecasts. Given the recent mixed messages on the inflation outlook, investors will be trying to decode how dovish the BoE really is. The November inflation report showed a significant downward revision of the short-term inflation outlook. The BoE members expect inflation rate to fall below 1% within 6 months and to stay below the 2% target for the next three years.

On the other hand, the minutes of the Bank’s November policy meeting, revealed that seven members who voted for the rates to remain on hold had a “material spread of views” on the balance of risks to the UK’s outlook of growth and inflation. While some of those views were focused on the possibility of weaker growth, other MPC members mentioned the potential for slack to be eroded faster than currently expected adding upward pressure on prices. Given these mixed signals by the MPC members, the hearing is likely to elucidate investors on just how dovish the BoE really is. I believe that at today’s inflation report hearing the MPC members will probably sound less dovish than they seemed in the November’s inflation report and will likely give more attention on the positive signs over the UK’s economic outlook. Even though the latest set of macroeconomic projections have pushed the timing for the first rate hike back, probably after the general elections in May, today’s hearing could strengthen GBP somewhat.

Overnight, Bank of Japan released the minutes of its Oct. 31st meeting where the board voted to expand monetary policy easing. The minutes showed that the four BoJ policymakers who opposed to last month easing, did so due to concerns that the further stimulus could hurt the Bank’s credibility and considered that it was appropriate to maintain the guidance for money market operations as before. On the contrary, Governor Haruhiko Kuroda stressed the Bank’s readiness for further stimulus to meet its inflation target, which is likely to keep JPY vulnerable.

Elsewhere, the NZD fell after the 2 year inflation expectation drop to 2.06% in Q4 from 2.23% in Q3, its lowest level since June 2013. This pushed kiwi down as it shows no urgency for the Reserve Bank of New Zealand to raise rates. Falling price expectations add to the already poor inflation outlook and will likely keep the NZD under selling pressure.

In Germany, the final Q3 GDP data confirmed the preliminary growth figure and showed that the German economy grew 0.1% qoq in Q3 a rebound from -0.1% qoq in Q2. Even though Germany barely avoided slipping into recession, the moderate growth is likely to keep EUR under selling pressure.

Today’s activity:

In Canada, retail sales for September are expected to rebound from the previous month, adding to the recent positive sentiment over the Canadian dollar and the optimistic outlook of the Canadian economy.

In the US, the 2nd estimate of the Q3 GDP is expected to show that the US economy expanded at a slower pace than initially estimated. The 2nd estimate of GDP is expected to rise at a 3.3% qoq SAAR pace, a downward revision from the first estimate of +3.5%qoq SAAR. The 2nd estimate of the core personal consumption index, the Fed’s favorite inflation measure, is forecast to have declined from the Fed’s 2% target. The Federal Housing Finance Agency (FHFA) home price index is forecast to decelerate slightly in September, while S & P/Case-Shiller house price index for the same month is expected to have rebounded from August. The Richmond Fed manufacturing index and the Conference Board leading index both for November are also coming out.

Besides BoE hearing, ECB Governing council member Ewald Nowotny also speaks.

The Market

EUR/USD rebounds and hits 1.2440

EUR/USD continued its rebound on Monday to hit the resistance line of 1.2440 (R1) and the lower bound of the short-term blue upside channel. Since the possibility of a lower high near that area is high, I would expect the forthcoming wave to be negative and target once again the support area of 1.2360 (S1), defined by yesterday’s lows and the lows of the 6th and 7th of November. A clear move below that obstacle would confirm a forthcoming lower low on the daily chart and perhaps open the way for the 1.2250 (S2) area, marked by the lows of August 2012. Taking a look at our daily momentum studies, I still see positive divergence between them and the price action, something that gives me additional reasons to wait for a decisive dip below 1.2360 (S1) before getting more confident on longer-term downtrend.

• Support: 1.2360 (S1), 1.2250 (S2), 1.2130 (S3).

• Resistance: 1.2440 (R1), 1.2500 (R2), 1.2575 (R3).

Is USD/JPY ready for a correction?

USD/JPY moved in a quiet mode staying between the support line of 117.00 (S1) and the resistance of 119.00 (R1). The RSI, although above 50, it is pointing down, while the MACD, although positive, stands below its signal line. Having in mind our momentum studies, I would expect USD/JPY to correct lower, perhaps for a test at the 117.00 (S1) barrier. A clear break below the 117.00 (S1) hurdle could extend the correction, perhaps towards the next support line, at 115.45 (S2). Switching to the daily chart, I still see a longer-term uptrend, but our daily momentum signs amplify the case for the beginning of a corrective move. The 14-day RSI is pointing down and could exit its overbought territory, while the daily MACD shows signs of topping and could cross below its trigger line in the near future.

• Support: 117.00 (S1), 115.45 (S2), 114.00 (S3).

• Resistance: 119.00 (R1), 120.00 (R2), 121.00 (R3).

AUD/USD finds resistance near the 0.8700 line

AUD/USD formed a lower high near the 0.8700 (R1) area and declined to find support at 0.8570 (S1), a support line determined by the low of last Thursday. On the daily chart, since the rate remains below both the 50- and 200- day moving averages, I still see a longer-term downtrend, but I still can spot positive divergence between both our daily momentum studies and the price action. As a result, I would prefer to see a dip below the key line of 0.8500 (S2) before getting more confident on the downside. Such a move is likely to confirm a lower low on the daily chart and perhaps open the way for the 0.8300 (S3) area, defined by the lows of July 2010.

• Support: 0.8570 (S1), 0.8500 (S2), 0.8300 (S3).

• Resistance: 0.8700 (R1), 0.8800 (R2), 0.8900 (R3).

Gold consolidates below 1205

Gold moved in a consolidative manner on Monday, staying below the 1205 (R1) resistance hurdle. Shifting my attention to our near-term momentum studies, I see negative divergence between both of them and the price action. As a result, I would not rule out a short-term top near the 1205 (R1) area and a pullback towards the 1180 (S1) area or the lower boundary of the black upside channel. In the bigger picture, I still see a longer-term downtrend. Hence I would treat the recovery from 1132 as a corrective move for now. In the absence of any major bullish trend reversal signal, I would prefer to adopt a “wait and see” stance as far as the overall outlook of the precious metal is concerned.

• Support: 1180 (S1), 1160 (S2), 1146 (S3).

• Resistance: 1205 (R1), 1222 (R2), 1235 (R3).

WTI slightly lower

WTI declined slightly yesterday to find support near the 75.50 (S1) line. A dip below that line is likely to extend the bearish wave perhaps towards the 73.20 (S2) zone, defined by the low of the 14th of November. The RSI moved below 50, while the MACD has topped and fell below its signal line. These signs designate somewhat negative momentum and support the case for further declines in the close future. On the daily chart, the price structure is still lower highs and lower lows below both the 50- and the 200-day moving averages, thus the overall path remains to the downside, at least for now. However, I would like to see a dip below 73.20 (S2) before trusting more that trend. Such a move would confirm a forthcoming lower low and perhaps open the way for the 71.00 (S3) area, determined by the lows of July and August 2010.

• Support: 75.50 (S1), 73.20 (S2), 71.00 (S3).

• Resistance: 77.80 (R1), 80.00 (R2), 83.00 (R3).

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

MARKETS SUMMARY