BoE Minutes confirm a rate hike is coming closer

No further USD correction for now

On Wednesday, the dollar initially strengthened across the board following Tuesday’s profit taking move, but especially against the commodity currencies. These were hard hit by ongoing falling commodity prices. However, also EUR/USD advanced and set an intraday low at 1.0869 while USD/JPY ticked higher to 124.15. However, after the European close, the dollar erased its intraday gains and closed versus euro at EUR/USD 1.0929, a minor loss of 6 ticks and at USD/JPY 123.97, a gain of 8 ticks versus the yen. Interest rate differentials corrected in favour of the US currency with the 2‐year differential setting a new cycle high and existing home sales being very strong, raising chances for a September Fed lift‐off. Also the hawkish BOE Minutes should have played in the advantage of the dollar. So, the dollar performance cannot but be qualified as disappointing in a short perspective. The greenback probably needs to digest last week’s gains.

Overnight, Asian markets trade positive to mixed with outperformance of Japanese (+0.35%) and Chinese (+2.5%) equities. South Korean GDP fell short of expectations, pushing USD/KRW sharply higher, preventing Korean equities losses. The Reserve Bank of New Zealand as expected cut its policy rate by 25 bps to 3% and said more easing is likely. The Kiwi dollar gained some ground versus USD, as the decision was expected and the Kiwi was hard hit in past weeks. US equity futures are modestly positive. EUR/USD tried to extend its rebound, but is again near yesterday’s closing values at 1.0935. USD/JPY is slightly stronger at 124.06.

EU consumer confidence sole eye-catcher of the day

Today, the only key indicators are the EMU consumer confidence and the US initial claims. The former may disappoint, while the latter may have declined more than expected (see FI section for details). As such, this would be in favour of the dollar. However, the dollar apparently needs more time to digest earlier gains. With the calendar thin and no public appearances, we suspect EUR/USD and USD/JPY to stay inside current trading ranges. The moves on the equity markets have been too small to affect FX trading in a directional way. Today, earnings reports may be interesting, but whether these will be enough to push the S&P to new highs is questionable. US equities may need somewhat more downward correction following last week’s stellar run. On the other hand, there is no trigger to establish a real risk‐off climate.

In a longer term perspective, EUR/USD still trades in the 1.08/1.1467 consolidation range. The bottom of this range was tested on Tuesday, but a sustained break didn’t occur. The global picture remains USD constructive (EUR/USD negative), but some consolidation after the recent EUR/USD decline is occurring. We maintain a sell on upticks approach for return action lower in this range. EUR/USD 1.1224/78 is a first point of reference. The 1.1534 February correction top remains our line in the sand to maintain a USD positive bias MT term. On the downside, the 1.0819/09 area (27 May low/correction low) is the first high profile support. A sustained break below that level would open the door for a retest of the 1.0521/1.0458 area.

BoE Minutes confirm a rate hike is coming closer

Yesterday, the minutes from the BoE’s July MPC meeting stole the show. All BoE policy members still voted to leave the policy rate and stock of assets purchased unchanged. However, a number of members indicated that the balance of risks to the medium‐term inflation outlook versus the 2% target was becoming more skewed to the upside. Without uncertainty due to the Greek debt crisis, a number of members thought the balance between leaving rates unchanged and a small rate hike was becoming finely balanced. The BoE sees signs of rising domestic costs, which are only partially balanced by the impact of a strong pond. In globo, several members are moving closer to a rate hike.
The tone from the Minutes was in line with recent BoE communication. Even so, sterling regained ground against the dollar and even more against the euro.
After te European closure, sterling gave back some ground versus both the dollar and euro, but kept good daily gains as EUR/GBP closed at 0.6999, after setting an intra‐day low at 0.6963. Cable closed at 1.5613, up from 1.5558 previously.

Today, the June UK retail sales will be the key item for sterling trading. Market expectations are for a decent 0.4% M/M and 4.8% Y/Y increase. The BRC retail sales were strong in June, but the CBI retail sales slowed somewhat. We still see upward risks for the official reading, which would be a confirmation that domestic demand remains strong. The data should be sterling positive.
However, we doubt whether sterling will be ready to make another leap forward as it probably needs to digest the previous rally. However, we stay positive on sterling, but are cautious short‐term.

We had a sell‐on‐upticks approach for EUR/GBP to drift lower in the 0.7483/0.7014 range. Of late, we turned more cautious on sterling as EUR/GBP neared this range bottom. We kept the working hypothesis that high profile news is needed to push EUR/GBP sustainably below 0.70. However, the ongoing decline of EUR/USD kept EUR/GBP under downward pressure too. The pair dropped well below the 0.70 mark. We stay reluctant to jump on the sterling rally at the current levels and hope that the rebound goes a bit further to reinstall/add EUR/GBP shorts. Even so, the break below 0.7000/0.6988 clearly deteriorated the technical picture of EUR/GBP.