Sterling Tumbles after MPC
It’s an extremely volatile day with sharp decline in Sterling and Australian dollar, as well as much volatility in the Japanese yen. Sterling tumbled after Jan MPC minutes revealed that the decision for BoE to hike the base rate by 0.25% to 5.25% was much tighter than market expects. It was made by a 5-4 vote, instead of anticipated 7-2 vote with BoE Chief Economist Charles Bean, BoE Deputy Governor Rachel Lomax, Paul Tucker and David Blanchflower dissented in favor of no change.
Strength in global economy and domestic growth, diminishing spare capacity, rising inflation were cited as the reason for hike. A rapid increase in the money supply and accelerating asset price growth only exacerbated the risks. The minutes said that “for a majority of members there was already sufficient evidence to justify an increase in bank rate and no compelling reason to delay,” and there was “little risk that an increase in interest rates would cause an unnecessarily sharp slowdown in activity.” In contrast, those dissented argued that inflation would fall back later this year and emphasized that the MPC should not be seen as “reacting to short-term volatility in CPI inflation”.
The overall debate centers around whether preemption is better than waiting for additional evidence. Jan’s move should have basically eliminated another hike again in first quarter and markets are quickly scaling back the bets on it. Opinions on whether there will be another hike in second quarter is divided and focus will be back on fundamental data including earnings growth and inflationary expectations.
Sterling’s was supported initially by better than expected Q4 GDP data which was released at the same time as the MPC minutes. The report showed U.K. GDP growth accelerated to 0.8% qoq and 3.0% yoy. This compares to the prior quarter’s 0.7% qoq and 2.9% yoy and is ahead of consensus expectation of 0.7% qoq and 2.9% yoy. However, Sterling’s fall resumed later into US session.
The Japanese yen has been very volatile today. Downside surprise in Australian CPI has promoted some carry trade unwinding which sent the Aussie lower and rigged a broad based rebound in the Japanese yen which was then fueled by weakness in GBP/JPY cross. However, momentum in the Japanese yen was short lived as yen has retreated back into established range. Nevertheless, further volatility in the yen is still likely, in particular with RBNZ rate decision insight.
While RBNZ is widely expected to keep rate unchanged at 7.25% after the CPI has fell back to RBNZ’s target range. Focus will be on whether Governor Allen Bollard will deliver a dovish inflation outlook which could trigger further yen carry trade unwinding.
Daily Pivots: (S1) 1.9738; (P) 1.9826; (R1) 1.9900;
Cable’s sharp fall from 1.9913 extends further to as low as 1.9662, touching 4 hours 55 EMA (now at 1.9685) as expected. At this point, further decline is still expected to follow as long as cable stays below 1.9771. But downside should be contained by 1.9588 cluster support (50% retracement of 1.9261 to 1.9913 at 1.9587) and bring another rise before completing the rally from 1.9261.
Above 1.9771 will suggest that fall from 1.9913 has made a temporary low and intraday bias will be shifted back to the upside. But, break of 1.9913 is needed to indicate recent rise from 1.9261 has resumed for 138.2% projection of 1.8090 to 1.9142 from 1.8517 at 1.9971 and then 2.0000 psychological resistance. Otherwise, risk of another fall remains.
In the bigger picture, close attention will be paid to sign of loss of upside momentum and reversal pattern formation as cable approaches 2.0106 cluster resistance (1992 high, 100% projection of 17047 to 1.9024 from 1.8090 at 2.0067).
However, right now, bearish divergence is being displayed in daily MACD and weekly RSI. A break below 1.9588 cluster support will suggest the rise from 1.9261 has possibly completed already and will shift focus to rising trend line support (1.8517 to 1.8834, now at 1.9405).
Shing-Ip Tsui is the founder and CEO of
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