Dollar Recovers on NFP Speculation, Sterling Lower Despite BoE Hike

Dollar is trying to stage a recovery in US session after strength in ADP employment report prompted some short covering on speculation of an upside surprise in tomorrow’s Non-Farm Payroll. ADP employment report posted an upside surprise by showing 150k job growths in Jun comparing to expectation of 100k. That should have raised expectation of the markets on tomorrow’s Non-Farm Payroll. With ADP
is off by an average of around 20k in recent months, the NFP could show around 170k job growths, which is considerably higher than the current consensus expectation of 120k. The better than expected ISM Services index which rose to 60.3 versus expectation of 58.0 also helps support the greenback..

There is much volatility in Sterling today after BoE raised benchmark interest rate by 25bps to 5.75%. However, after all, GBP/USD is still limited by 26 year high of 2.0206. MPC judged the rate hike is “necessary to meet the 2% target for CPI inflation in the medium term.” The accompanying statement cited “output growth has remained firm” and “Credit and broad money continue to grow rapidly” and risk to inflation outlook remains on the upside. However, the statement also acknowledged that CPI moderated back to 2.5% in May and lower energy prices will make CPI continue to fall back to BoE’s target of 2%. Part of the markets expect another rate hike from BoE by year end but opinion is divided. It’s believed that today’s decision is done again on a tight vote and focus will be turning to meeting minutes to be released on Jul 18 on the actual vote split. Also, the next quarterly Inflation Report is due Aug 8 and will be closely watched.

ECB kept rates unchanged at 4.00% as widely expected. In the following press conference, Trichet maintained a hawkish tone by describing monetary policy is “still on the accommodative side”, inflation risk remains on the upside in the medium term and “acting in a firm and timely manner” is warranted. Trichet also noted the M3 growth as rapid. When asked about the market expectation of a Sep hike. Even though the Aug meeting will be done as a teleconference, a press conference following the meeting will not be excluded. Trichet warned market’s over-interpretation of ECB’s language and implied that only ‘strong vigilance’ phase has meaning, but not the ‘very’ in ‘monitor very closely’.


Daily Pivots: (S1) 2.0140; (P) 2.0171; (R1) 2.0193; More

After some volatility, cable is still limited by 2.0206 high and 61.8% projection of 1.9183 to 2.0132 from 1.9621 at 2.0207. Break of 2.0130 minor support, with 4 hours MACD staying below signal line, suggest that at least a short term top is formed and further decline is now expected to be seen towards 4 hours 55 EMA (now at 2.0068) first.

Key focus will be on 1.9928 cluster support (50% retracement of 1.9657 to 2.0206 at 1.9932). As long as pull back is contained by this cluster support, the rally from 1.9621 should still be in force and another rise should still be seen after correction. However, break of 1.9928 cluster support will suggest that rally from 1.9621 has completed after failing to take out 2.0207 projection target and put medium term rising channel back into focus again.

In the bigger picture, the completion of the fall from 2.0132 in a corrective 3 wave manner and the holding of the medium term rising channel indicates that rise from 1.8090 is still in progress, so is the whole up trend from 1.7047. There are various interpretation of the rally from 1.7047 but none is really convincing yet. Also, medium term upside momentum remains unconvincing with bearish divergence conditions staying in weekly MACD and RSI as well as daily MACD and RSI.

Focus should now be on 2.0207 projection target. Sustained break of this level will add much credence to the case that whole up trend from 1.7047 is resumption of multi-year up trend from 1.3680. In such case, further rally should then be seen to 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677 first. On the other hand, failure of taking out this projection target and sustained trading below medium term rising channel (now at 1.9744) will argue that whole rise from 1.7047 has completed and put 1.9183 support into focus.

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Shing-Ip Tsui is the founder and CEO of ActionForex is set up with the aim to empower individual forex traders by providing insightful contents. Analysis reports, live pivot points on majors and crosses, etc are provided with collection of carefully selected educational articles and free trading ebook downloads.