China cuts rates, EUR/GBP eyes 0.7150‐0.7100

China announced a cut in its interest rates today; its fifth since November 2014 as the domestic stock markets continue to drop and adjust themselves to the slowing economy.

More about Fed less about China

The crash in the markets across the globe witnessed on Monday had more to do with delay in the Fed rate hike, rather than the turmoil in China. The Chinese GDP stood above 11% in 2010 and since then has steadily dropped to 7% in 2015. It means the slowdown is evident for years and the sharp fall in the Chinese stocks is merely the markets reverting back in line with the economy.

Investors worried: Where do we go?

The risk aversion seen on Monday was more due to the speculation that the much hyped rate hike may not happen in September. With the rout in stock markets, the rate hike may not happen at all in 2015. The fears of a delay in the rate hike spooked markets since it is being sold as a net positive for the US and global economy.

Moreover, since Q3 2014, the US economic recovery held up the global markets. China’s weakness was evident, while Eurozone faced deflationary forces. The commodity exporters had little to cheer about amid falling exports. Consequently, investors remained optimistic about US and believed the upcoming rate hike is indeed a positive sign. However, the increasing probability of a delay in rate hike would mean the US economic recovery in faltering and investors are left with no place to go.

China’s rate cut opens doors for a Fed rate hike

The increasing speculation of a delay in the Fed rate hike was more due to the instability in the financial markets rather than the Chinese economic slowdown. As mentioned earlier, the slowdown in China is in progress since 2010‐2011. Consequently, a rate cut by China today is likely to stabilize the financial markets and open doors for the Fed to hike rates at least once in 2015. Anticipating the exact month of the rate hike is a difficult call, although, we are likely to see September Fed funds futures show a rise in the rate hike probability from the current level of 25%. Moreover, China’s move to cut rates today indicates the bank’s willingness to do more in case markets continue to drop.

The EUR is likely to erase major part of its gains witnessed in the last couple of trading sessions. Meanwhile, the GBP is likely to remain relatively resilient since rising Fed rate hike bets also brings the Bank of England closer to its own rate hike. Furthermore, the GBP/USD witnessed a technical breakout from the range of 1.5460‐1.5960 on Monday.; thereby opening doors for a target of 1.5920‐1.5930.

A combination of these factors could mean the EUR/GBP has set a temporary top in place at 0.7420. The cross is likely to fall back to 0.7150‐0.7100 levels in the short‐term.

EUR/GBP Monthly chart

• On the monthly charts, the cross is already struggling to sustain above the falling channel resistance currently seen at 0.7285. Failure to do could push the spot back to 5‐WMA at 0.7100.

• On the higher side, a break above hourly 50‐MA at 0.7300 could see the pair re‐test 0.7340‐ 0.7350. However, the overall outlook stays bearish.