GBP: Correction due against commodity currencies?

The British Pound clocked multi year highs against major commodity currencies – CAD, AUD, and NZD on the divergent monetary policy path telegraphed by the respective central banks. The drop in oil and other commodity prices, coupled with the rout in the Chinese markets in July led to a sell-off in the commodity currencies.

Rates could rise at the turn of this year – BOE’s Carney

One of the major news in July was the Bank of England governor stating that the interest rates could rise at the turn of this year. This was the first time governor Carney hinted at the timing of the rate hike. Still, GBP/USD finished only moderately higher in July. Thus, a similar message this Thursday may not lead to a significant rally in the GBP. Moreover, the policy makers at the BOE are likely to avoid being toe-to-toe with Fed in telegraphing a rate hike.

BOE inflation report – Carney could talk down rate hike expectations

Bank of England will release the rate decision, Minutes and Quarterly Inflation Report (QIR) simultaneously on Thursday. The BOE is widely expected to communicate the rate hikes are coming, but not before 2016. The QIR forecasts is likely to include an upward revision of the growth forecasts. However, the short-term inflation forecasts are likely to be revised lower on account of a renewed sell-off in oil prices and strength in the GBP.

But, there is a risk of Carney turning slightly dovish mainly on account of the strength in Sterling. The PMI manufacturing report released today showed the export orders took hit in July on account the strength in the GBP primarily against the EUR. The PMI reports have highlighted the negative effect of strong GBP on export orders and input price inflation since last four months.

Over the surface, it appears this may not be enough reason for Carney to turn slightly dovish. However, the BOE policy makers run the risk of sending EUR/GBP even lower if they continue to remain hawkish ahead of the FOMC rate hike. Moreover, the EUR/USD pair is likely to fall sharply once Fed hints at rate hike. If the BOE stays hawkish, the EUR/GBP could drop sharply, thereby importing inflation and hurting exports.

Consequently, there is a possibility of Carney playing down the rate hike speculation this Thursday, thereby leading to a correction in the GBP across the board, including the commodity currencies.

Among the commodity currencies, the NZD appears more attractive against the GBP. The Kiwi suffered sharp losses in July as markets priced-in the ultra dovish RBNZ. Furthermore, the RBNZ governor also played down the necessity of more aggressive rate cuts in the short-term. Consequently, the GBP/NZD could be more attractive in case Carney turns slightly dovish on Thursday. Apart from NZD, the sterling could also turn lower against the CAD, in case the Crude prices halt the six-week losing streak.

GBP/NZD Technicals

• Bearish RSI divergence on the daily chart pushed the cross lower to 2.3156 last week, which was followed by a minor bounce to 2.3835 on Friday. A bearish close today could mean confirm further correction in the short-run.

• On the hourly chart, the cross is back above its 50-MA today as markets ditched the GBP after July PMI report showed a drop in export orders due to strength in the GBP. The hourly RSI has turned bearish indicating further losses.

• The pair could head towards the head and shoulder neckline currently located at 2.33 on the daily chart ahead of Thursday’s QIR. A slightly dovish tilt from Carney could lead to a fall towards 2.2912 (23.6% of Apr-July rally).