Thanks to the Bank of England, U.S. data and North Korea, it was an extremely lively day in the foreign exchange market. The big story was the BoE who voted 7-2 to leave interest rates unchanged. This decision was not a surprise and actually caused a knee jerk dip in GBP/USD but within seconds the pair reversed as the minutes showed a majority of monetary policy members seeing "scope for stimulus reduction in the coming months." As the Bank of England prepares to join the European Central Bank and the Federal Reserve in removing stimulus this prospect has and will continue to be extremely positive for sterling. Although third quarter growth is expected to be subdued, the central bank sees inflation exceeding 3% next month, which would be well beyond their 2% target. At the same time, "eroding slack reduces their tolerance for faster inflation," which is why the central bank believes the market is underpricing the chance of a rate hike. The tone of the BoE statement was unambiguously hawkish with BoE Governor Carney confirming that the odds of a hike have increased and he is among the majority on the MPC who see the need to change stimulus. Therefore we expect further gains in GBP, particularly against the U.S. dollar, Japanese Yen and commodity currencies. It may not be long before we see GBP/USD at 1.35.
The U.S. dollar on the other hand went on a rollercoaster ride today with USD/JPY spiking above 111.00 on the back of stronger U.S. data only to reverse less than an hour later on reports that North Korea is preparing for another missile test - this time possibly an ICBM. Consumer prices rose 0.4% in the month of August, driving the year over year rate from 1.7% to 1.9%. Excluding gas and autos, core prices also increased slightly but this improvement is distorted by hurricane as the price of gas and lodging increased significantly, causing CPI to shoot higher. Jobless claims also dipped after bouncing last week. The Federal Reserve meets next week and these reports won't affect their view on tightening - while they are ready to shrink the balance sheet, their minds haven't been made about a rate hike at the end of the year. Retail sales, industrial production, the Empire State manufacturing survey along with the University of Michigan's consumer sentiment index are scheduled for release on Friday. Although gas prices will drive up the value of purchases, weak wage growth, Hurricane Harvey and an earlier Amazon Prime Day in July could cause core retail sales growth to slow, which is the most important part of the release. For this reason, we believe USD/JPY peaked at 111.00 and should find its way back down to 110.00.
Although the prospects for the euro are promising it has been weighed down today by U.S. dollar strength and EUR/GBP selling. We continue to look for EUR/USD to recover but it is likely to underperform GBP in the near term with EUR/GBP eyeing a move down to 88 cents. To no one's surprise, the Swiss National Bank left monetary policy unchanged today. While they see the Franc's significant overvaluation as reduced, they view the situation in the FX markets as fragile and have pledged to intervene in the FX markets if needed. They also cut their 2017 GDP forecast to just under 1% from 1.5%, which is a sign of their concerns about the economy. The SNB will be one of the last central banks to raise interest rates resulting in underperformance of the Franc.
All 3 the commodity currencies traded lower including the Australian dollar which had ran to a high of 0.8016 on the back of strong labor market data. More than 54K jobs were created in the month of August, the strongest since March. The increase was driven by full and part time job growth and that's reflective of a solid labor market. Although the unemployment rate did not increase, the participation rate ticked higher so it should only be a matter of time before the jobless rate improves as well. Unfortunately, the rise in the U.S. dollar overshadowed the data causing AUD/USD to fall for the fourth day in a row. There's support at the 20-day SMA near 0.7960 but we prefer to buy AUD against weaker currencies such as NZD and JPY. The New Zealand dollar extended losses below 72 cents, shrugging off stronger consumer confidence numbers. House sales and the business PMI index are due for release this evening. While important, we don't expect this release to alter the uptrend in AUD/NZD. USD/CAD continues to hover around 1.22. However with yields on the rise and oil prices breaking above $50 a barrel we think it should only be a matter of time before the pair finds its way back to 1.21. In the meantime, the Canadian dollar may be a better buy versus other currencies such as the Swiss Franc, Japanese Yen and New Zealand dollar.
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