The British Pound is looking increasingly weak with each passing day. The UK data continue to disappoint, while Fed moving away from the lift-off is also reducing the BOE rate hike bets.
The inverted head and shoulder on the EUR/GBP chart and the possibility of the BOE tilting towards a rate cut was discussed here (Macro Scan Sep 29 2015). Since then, matters only complicated further for the Sterling bulls and the Bank of England.
The US non-farm payrolls report for September was horrible and threw 2015 Fed rate hike bets out of the window. The drop in the Fed rate hike bets has been well received by the markets so far. However, the drop in the Fed rate hike bets also means a less probability of the BOE lift-off next year.
Furthermore, the UK manufacturing and service PMI weakened to multi-month lows in September. The Sterling exchange rate remained a drag on export growth with new orders hitting multi-year lows. Given the sequential drop in the PMIs and the sequential drop in the exports, the industrial production figures for August due tomorrow are likely to disappoint market expectations as well.
The Bank of England, thus, has very a little room left to stay hawkish. The rates are likely to be held steady on Thursday, and the markets must be ready for a dovish surprise via minutes. A unanimous vote in favor of keeping rates unchanged (not surprising) would kill the Pound.
On the charts, Sterling appears extremely weak, especially against the EUR, USD and the JPY.
EUR/GBP – Sideways action followed by inverted head and shoulder breakout
EUR/GBP likely to consolidate in the range of 07270 (trendline support on the monthly chart) -0.7440 (in head and shoulder neckline), before witnessing an inverted head and shoulder breakout and a rise towards 0.7950 levels.
Only a weekly close below 0.7270 could turn the outlook bearish.
GBP/JPY – Sell-off could be violent, Eyes 200-month MA at 175.75
The cross could drop sharply to its 200-month MA at 175.75. The southward move would gain momentum once the USD/JPY pair confirms a bearish breakout from its symmetrical triangle formation.
The Bank of Japan (BOJ) is widely expected to do more (easing) in Octover. However, with interest rates already at record lows, and ongoing QE, it is likely the bank would resort only to verbal intervention. Furthermore, the risk-on rally in the stocks is unlikely to last long. Cheap money is unlikely to fuel asset price inflation anymore; at least in the short-run. Consequently, the USD/JPY pair is expected to see a bearish break from the symmetrical triangle formation.
With this, the GBP/JPY could see a sudden drop to below 180 levels. A dovish BOE would ensure the sell-off is extended to 175.75 levels.
Bears to remain on sidelines in case the pair breaks above 184.04 (50% retracement of July 2007 to Oct 2011plunge).
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