Central Bank Policies in play – JPY, GBP and USD

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HotForex Market Review
HotForex Market Review

GBPUSD and GBPJPY, H4 and Daily

Cable has settled around the 1.3100 mark after declining over the last 2 weeks as market participants contemplate the sharpening sense of Brexit-related risk. Some senior government members have openly warned of there being an exit from the EU without new terms being agreed. Such a scenario would see the UK adopt WTO trading rules and likely cause significant bureaucratic disruption.

Many businesses having been voicing their concerns about the potential damage this scenario could cause. Hence top of the UK’s agenda this week is the August BoE MPC meeting, which is widely expected to hike the repo rate by 25 bp this Thursday, which would likely be accompanied by cautious guidance. This would be the 3rd hike of a gradual tightening cycle. Sterling money markets have been discounting about a 80% probability for a quarter-point August hike (according to Reuters), so there may be some scope for the Pound to rally and for UK yields to dip in the event of a hike, though BoE is anticipated to couch the tightening in overall cautious guidance.

In addition, inflation and growth projections are expected to remain largely unchanged from the previous inflation report in May. BoE has long maintained a Brexit caveat — that its economic projections are based on the Brexit negotiation process going smoothly — and this will likely be emphasized given the prevailing uncertainty on this front.

BoE VS Fed

Hence in a rather soft start to the week, the June lending data in UK came in on the firm side of expectations, keeping BoE on track to hike rates this week.  As for the Fed, Fed meets Tuesday and Wednesday, but an unchanged policy is widely expected after the hike in June and therefore the Dollar expected to likely rise than to fall, in trade-weighted terms, given the relative strength of the US economy and the Fed’s ongoing course to tighten policy (2 more 25 bp hikes in the Fed funds rate expected this year, one in September and another in December). Though Trump’s proclivity for verbal interventions in Fed policy and Forex rates makes it tactically challenging for Dollar bulls.

So far today, GBPUSD remains within Friday’s range between 1.30801.3140 after having drifted from 1.3212 top. The pair continues to be negatively configured since the wild drift in April, as it still holds within a downchannel, below all 3 daily MAs (20,50 and 200). Last week’s new lower low and new lower high swing, along with momentum’s indicator’s performance, suggest that the pair has not been oversold yet.

Daily MACD lines have flattened below neutral zone, presenting a ranging market in short term but insisting in the negative bias in long term. RSI is at 44, bounding since April between 50-30 suggesting that downside momentum is not running out of steam, it is just making some corrections to the upside before retracing lower again. Only a break above channel’s trendline which is also close to 50-day MA, at 1.3250-1.3300 could give signs of possible reversal to the upside and could retest July’s peak at 1.3360.

However as the overall but also the near term picture remains negative, on the break of recent low at 1.3080, the next Support levels to be watched are: 1.3000, 1.2960 and 1.2900.

BoE VS BoJ

As Central Bank policy decisions in the US and the UK are looming up, BoJ started today its 2-day meeting amid speculation for tweak to stimulus program. GBPJPY reversed Friday’s losses today as the Yen has held in a narrow ranges on the anticipation of BoJ rate announcement.

The pair has been trading with little overall direction since early 2017, pulled lower during risk-off phases in global markets and pulled higher when markets are more focused on underlying fundamentals. BoJ decision is on tap after the close tonight, publishing revised growth and inflation forecasts. A recent Reuters report, citing sources, alleged that the central bank is considering tweaking its stimulus program to make it more “sustainable” (i.e. trim back on it). Worries that such a move could be an early warning of a shift away from uber-accommodation saw JGB yields spike higher last week. That, in turn forced BoJ to step in and offer to buy an unlimited amount of paper. BoJ is not expected to suggest that a more hawkish stance is on the way. There is a risk that BoJ refrains from signalling any actual policy changes next week and, rather, confirms that it is looking into policy changes.

GBPJPY found Support today at last week’s low fractal at 145.20, since it rebounded from that area up to the 145.87. It is meanwhile holding resistance between the 50-day MA and last week’s peak, at 146.40-146.50 area. Despite intraday positive momentum noticed so far, the pair remains bearish as it is traded for 7 consecutive day below the 20 and 50-day MA.

Medium term momentum indicators slightly decreased the negative momentum by attempting to lift higher, however they failed to cross above the neutral zone. RSI is at 46 and MACD lines picked up but sufficiently enough. Daily RSI is at 42, while MACD oscillator drifted to the negative area as signal line is at neutral looking to the downside. This along with the recent doji 4-hour candle suggests that upside momentum is running out of steam.

In the 4-hour chart, on the upside only a breakout above the immediate Resistance at the 50-period MA, which coincides with the 50% Fib. level set since April 2017, at 146.13, could imply the retest of the long term Resistance at 146.40-146.50. Further gains would open the doors towards Fibonacci extension 61.8, at 147.50.

To the downside and as the GBPJPY is in a bearish mode since July 16, a break below the immediate Support at 145.20, suggests the increase of negative momentum and hence the pair is likely to be pushed to June’s low levels at 143.77 – 144.30.

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