• Prior 32.52k

This article was written by Justin Low at www.forexlive.com.

I’m going to use this post to also put up the key takeaways from the BOE meeting decision. So, let’s dive right into it.

• BOE raised bank rate by 50 bps to 1.75%, as expected (~92% priced in according to OIS)
• Bank rate vote to hike was 9-0, but Tenreyro dissented by voting for a 25 bps rate hike instead
• BOE forecasts inflation to peak at 13%, sees 5(!) quarters of negative economic output starting from Q4
• Adds the passage „policy is not on a pre-set path“ to forward guidance

There isn’t anything there to really get the pound excited and the dire economic forecasts as well as the subtle shift, which is a page right out of the RBA playbook, is a signal that another central bank has joined the ranks in the next stage of the tightening cycle.

In other words, this is the BOE starting to acknowledge risks surrounding the economy and outlook and that could temper with their appetite to stick with rate hikes – or at least more aggressive ones – moving forward.

All in all, this reads like a one-and-done 50 bps rate hike, as much as punters are still betting on another one in September.

The pound has fallen on the decision after a bit of a whipsaw, with cable dropping to a low of 1.2092 before keeping around 1.2100-20 levels at the moment. Price was holding around 1.2170 before the decision with the whipsaw high hitting 1.2210 and held back by the 100-hour moving average (red line).

So, what’s next for the pound?

There is some minor support around 1.2100 next and then the 29 July lows around 1.2062-65, so a break of those levels will put the pressure back on 1.2000 again; all else being equal. But the dollar side of the equation will also matter for cable, with the US jobs report a key risk event for tomorrow.

As for sterling itself, don’t count on the BOE for any policy tailwind anymore. It is shaping up like they will be one of the first ones to pause in the tightening cycle and as soon as there is a clearer pivot in that sense in the months ahead, expect that to weigh more on the pound. For now, this just removes any potential tailwind for the quid but apart from the dire economic outlook, the subtle shift on its own may not be too heavy an anchor. That said, watch out for the technicals as outlined above.

This article was written by Justin Low at www.forexlive.com.

• Prior 1.25%
• Bank rate 9-0* vote vs 9-0 expected (*Tenreyro voted to raise rates by 0.25%)
• Labour market remains tight, domestic cost and price pressures elevated
• Estimates Q2 GDP to fall by 0.2% (June forecast was -0.3%)
• Sees Q3 GDP increasing by 0.4%
• Risks surrounding projections are exceptionally large at present
• Inflationary pressures are nevertheless expected to dissipate over time
• But there is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures
• Policy is not on a pre-set path
• BOE will be particularly alert to indications of more persistent inflationary pressures, and will if necessary act forcefully in response
• Full statement

After a bit of a whipsaw, the pound has fallen on the decision as the BOE takes a page right out of the RBA playbook. In terms of the forward guidance, they added the passage that „policy is not on a pre-set path“. As for the inflation outlook, the BOE sees consumer inflation overshooting towards 11% with a staggering peak of 13% in the UK.

On the economy, the BOE views five quarters of negative GDP starting from Q4 2022 – the longest recession period since the global financial crisis. Oof.

All in all, this still reads out more like a one-and-done 50 bps rate hike considering the economic outlook. Cable has fallen down to 1.2095 at the moment.

This article was written by Justin Low at www.forexlive.com.

• There is still some ways to go to get to restrictive monetary policy
• Fed is following data very carefully, thinks that „we will get it right“
• Q2 slowdown was more concerning than Q1
• We’re going to move inflation back to 2% over time

There isn’t anything here from Bullard that hasn’t already been said but from the headline remark, he is alluding to at least a 50 bps rate hike in each of the final three FOMC meetings of the year. The Fed had toned down its aggressiveness after reaching neutral and markets will watch for any recessionary signals that could further dampen the mood in that sense. For now though, policymakers are adamant that they can keep on the path until year-end and that a ‚real‘ recession is not on the cards.

This article was written by Justin Low at www.forexlive.com.

In terms of how this will impact production for the bloc, it isn’t going to do anything. The members are well in compliance with current output levels already, so this will just continue to keep things as it is. If anything else, only Saudi Arabia and UAE are the two countries with any real spare capacity so that tells a lot about the situation involving OPEC+ at the moment.

Oil prices are responding well though as this could be a sign that OPEC+ are done with the moderate increases in output – which were aimed at appeasing the US perhaps. WTI crude oil is now up 1.4% on the day to $95.10.

This article was written by Justin Low at www.forexlive.com.

WTI crude is holding at key support still as seen above, although price did break below its 200-day moiving average (blue line) earlier in the week. Sellers are looking to push the agenda but buyers have been stubborn around the support region around $93.50 on the daily chart.

OPEC+ is said to be considering an output increase of around 100k to 400k bpd today but really, does it matter? In June, compliance for the bloc was 320% so this is really nothing as compared to what they cannot pump out at the moment. The fact of the matter is that the bloc just cannot produce more.

I’m still an oil bull as the backdrop of declining inventories (also at very low levels) and waning supply conditions are still massive tailwinds for the commodity. But recession risks are a key headwind to deal with and that won’t go away any time soon either.

There is a strong case for oil to push back well above the $100’s but sometimes, you have to respect the charts.

This article was written by Justin Low at www.forexlive.com.

Wang Yi says that US politicians who „openly play with fire on the Taiwan issue will come to no good end“ as China continues to step up its warnings against US House speaker, Nancy Pelosi’s visit to Taiwan today.

Again, these warnings serve as a pin to keep markets more on edge at the moment but at the end of the day, it will come down to the actual Chinese response to the matter. That is what will be the key thing to watch for risk trades.

This article was written by Justin Low at www.forexlive.com.

• Beijing said to ready countermeasures to Pelosi’s Taiwan visit, including military actions
• US jet believed to be carrying Pelosi delegation take the long way round to Taiwan
• Chinese foreign minister Wang Yi delivers warning ahead of Pelosi visit to Taiwan
• Dollar and yen hold firmer as US-China tensions weigh on sentiment
• RBA raises cash rate by 50 bps to 1.85%, as expected
• RBA takeaway: Time to slow down?
• UK July Nationwide house prices +0.1% vs +0.3% m/m expected

Markets:

• JPY leads, AUD lags on the day
• European equities lower; S&P 500 futures down 0.6%
• US 10-year yields down 5 bps to 2.55%
• Gold up 0.4% to $1,778.53
• WTI crude up 0.8% to $94.60
• Bitcoin down 0.8% to $22,933

US-China tensions are keeping markets on edge today as all eyes are on US House speaker, Nancy Pelosi’s visit to Taiwan. The aircraft believed to be carrying her delegation is en route to Taipei, taking the long way round after her visit to Kuala Lumpur.

With there being a sense of apprehension and anxiety, safety flows dominated as equities retreated while bonds were bid on the session. Meanwhile, the dollar and yen firmed with the former in particular advancing notably across the board.

EUR/USD fell from 1.0270 to 1.0215 while GBP/USD retreated from 1.2255 to 1.2186 before keeping just above 1.2200 now, but still down 0.2% on the day. USD/JPY itself is down 0.6% to 130.80 levels but is off earlier lows from Asia with the range in Europe being around 130.60 to 130.90 for the most part.

The antipodeans bore the brunt of the risk retreat with the aussie facing a double-whammy after the RBA was seen as less hawkish, opening the door to a slower pace of rate hikes moving forward. AUD/USD fell from 0.7015 to 0.6965 initially before falling further to 0.6915 as risk sentiment deteriorated. Meanwhile, NZD/USD fell from 0.6335 to 0.6275 and is set to snap a run of four straight days of gains.

The focus in the session ahead will be on China’s response to Pelosi’s visit and what comes next in US-China tensions in general. But keep in mind that USD/JPY and the bond market are still going to be key drivers regardless in trading this week.

This article was written by Justin Low at www.forexlive.com.