Pound firms amid rising BoE rate hike expectations
Fawad Razaqzada October 30, 2017 12:18 PM
The early indications suggest speculators are warming up to sterling, possibly on expectations that the Bank of England will hike interest rates for the first time since before the financial crisis.
The pound has started the new week on the front foot after it managed to come off its worst levels against the dollar on Friday. Against the euro, it closed higher for the third straight session on Friday, before extending its gains at the start of today’s session. Other GBP crosses were also higher across the board at the time of this writing. The early indications suggest speculators are warming up to sterling, possibly on expectations that the Bank of England will hike interest rates for the first time since before the financial crisis. The BoE may also revise its inflation expectations higher than expected, which may mean another rate hike next year. There’s also key UK PMI data to look out for this week, although they will be overshadowed by the BoE’s Super Thursday meeting.
GBP crosses on watch
If the pound is going to strengthen this week then it may perform the best against currencies which are already weak or expected to weaken. The Swiss franc may be one such pair as it continues to remain unloved because of the Swiss National Bank’s extraordinary loose monetary policy stance, and ongoing “risk-on” trade which has reduced the appeal of perceived safe-haven commodities and currencies, including the franc.
But for me the GBP/NZD may be an even better pound cross to watch and potentially trade, for we will also have important data from New Zealand to look forward to on Tuesday evening or Wednesday morning NZ time. Employment in NZ is expected to have risen by 0.8% in the third quarter after an unexpected 0.2% drop in Q2. Given the political uncertainly in NZ over the past few months, it wouldn’t come as a shock to see another drop in NZ employment or at best a smaller-than-expected pick up. Thus, the potential for disappointment is there, which, if realised, could underpin the GBP/NZD pair.
GBP/NZD breaks out
Indeed, the trend for the GBP/NZD pair is objectively bullish anyway. Not only has it been making higher highs and higher lows since bottoming out a year ago, price is also holding above its 21-, 50- and 200-day moving averages. The moving averages reside in an ascending order and point higher, too. With the GBP/NZD last week breaking through major resistance around 1.90, or more specifically in the 1.8950-1.9070 range, this area has offered some support at the start of this new week. Thus going forward, the bulls need to hold their ground here if the short-term bias is to remain bullish this week. However, a potential break below this area could pave the way for a deeper pullback before the bullish trend probably resumes. On the upside, the Fibonacci extension levels at 1.9400/5 (1.272%) and 1.9960/5 (161.8%) are among the bullish objectives. The latter also comes in just ahead of the next horizontal resistance and psychologically-important 2.0 hurdle, which was formerly support. Although we are miles away from this level, the possibility of weaker NZ data and a BoE rate hike could take us there in no time, not to mention the fact that the area between 2.0000 and 1.9070 is effectively a gap, given how priced had previously dropped through this region in the past. This “gap” may get filled over the coming days and weeks.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.