• Bank rate can be cut when there is sufficient evidence of a downward path in inflation persistence
• Focusing just on the next BOE meeting is a little ill advised
• We must focus on the underlying components of inflation
• But also on the persistent components, not just the headline rate

The comments are pretty much a follow up to the ones we saw from Bailey yesterday. It’s been a pretty boring session for sterling, even with the beats in the UK GDP data earlier. Cable is flat at 1.2525 on the day currently.

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

• That is if additional evidence received by then confirmed the medium-term inflation outlook embedded in the March projections
• A few members felt sufficiently confident that the three elements of the reaction function gave grounds for a reduction in the policy rates already at the present meeting
• The risk of undershooting the inflation target and eventually having to pay too high a price in terms of declining activity was now seen as being at least as high as the risk of acting too early and overshooting the target
• Broad consensus to wait until the next monetary policy meeting to see further evidence of, and gain sufficient confidence in, a timely and sustained return of inflation to target
• Members stressed the value of waiting until June for further evidence confirming, or indicating a change to, the outlook
• Members stressed that maintaining a data-dependent approach with full optionality at every meeting was warranted
• Data dependence meant not overly focusing on one data point, as the path many indicators took was likely to be bumpy
• Members felt that markets had understood the ECB’s communication and reaction function and were prepared for the possibility of a rate cut at the June meeting
• Full accounts

The most important takeaway from all this is the final bullet point. That being the ECB is prepared for a June rate cut and that they are comfortable with the idea that markets are also prepared for that. ‚Nuff said.

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

If you think that experienced
traders don’t make mistakes, think again. I remember Stanley Druckenmiller, one
of the best (if not the best) global macro traders in history talking about how
he lost billions when he went long the tech stocks in 2000 missing the top of
the bubble by an hour or so.

Even though he
knew he shouldn’t have done that and told himself many times to refrain from
buying, he eventually fell into the emotional trap of the fear of missing out
(FOMO). He didn’t learn anything from that mistake, it was just a normal human
impulse. The reality is that such emotion driven mistakes do happen and no one
is exempt from them.

Another common
mistake experienced traders fall into is market timing. Timing well the market
consistently is basically impossible. The market is a big chaotic thing that, especially
in the short term, can be noisy and very volatile.

Jim Rogers, another
famous global macro trader who co-founded with George Soros the Quantum Fund,
is not shy to admit that he’s very bad at timing the market and although his
fundamental views often proved right, timing is what made him lose money.

He once went all-in short six stocks that he had the most conviction in. Two months later he was
completely wiped out. Was he wrong? Not at all, because 2 years later all those
six companies went bankrupt. Unfortunately in trading, being right but being early eventually
ends up in being wrong.

Mistakes will be
part of your trading career no matter how good you are or how much knowledge and
experience you have. What will make the difference is how fast you will
recognize your mistakes and how well you will manage them.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

• I still have that belief that we can lower rates this year
• We’re hearing from pretty much everyone that pricing power is pretty much at its limit
• That should help with further progress on the inflation front
• We are still seeing robust job growth
• It may take a while for labour market conditions to ebb further
• Still sees a single 25 bps rate cut as being likely for this year
• Thinking less of the extent of rate cuts but more on getting the timing right to start the cycle

It’s still about the timing at the moment with markets favouring a September move. I’d take his comment on there being one rate cut only with a pinch of salt. If the Fed gets going in at any point besides December, we could easily see them go for another as long as the same conditions hold.

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

The USD weakened across the
board yesterday following a notable miss in the US
initial claims data as that added some more pressure on the USD with the
market weighing the possibility that the labour market could weaken fast enough
in the next months to justify more rate cuts than expected. Overall though, the
price action has been rangebound this week as the lack of key catalysts and the
waiting for the US CPI report kept the market at bay.

The CAD, on the
other hand, has been under pressure in the first part of the week maybe due to
the sustained weakness in crude oil prices and expectations building for the BoC
to cut rates in June, although the employment data today and the Canadian CPI
report on May 21st will likely decide if the BoC will wait until July or
proceed with a cut already in June.

USDCAD
Technical Analysis – Daily Timeframe

On the daily
chart, we can see that USDCAD bounced from the key support
zone around the 1.36 handle where we can also find the confluence
with the trendline
and the 61.8% Fibonacci
retracement level. A break below that support should see the sellers
gaining more conviction and increasing the bearish momentum into new lows. The
buyers, on the other hand, keep on stepping in around these levels to position
for a rally back into the cycle highs around the 1.39 handle.

USDCAD
Technical Analysis – 1 hour Timeframe

On the 1 hour chart,
we can see that the upward trendline got breached recently with the sellers
piling in to extend the drop into the 1.36 support. From a risk management
perspective, the sellers will have a better risk to reward setup around the
downward trendline where they will also find the confluence of the 38.2% Fibonacci
retracement level and the 1.37 handle.

The buyers, on the
other hand, will want to see the price breaking higher to invalidate the
bearish setup and position for a rally into the 1.3785 level. The red lines
marked on the chart define the average
daily range of the pair, which is generally the maximum movement we can get
on any given day barring major surprises in the market.

Upcoming
Catalysts

Today we conclude the week with the Canadian labour market
report and the US University of Michigan consumer sentiment survey. Weak
figures across the board for the Canadian jobs data should raise the probabilities
for a rate cut in June, although there’s not much more to price in. In fact, the
next big event to watch will be the US CPI next Wednesday as that will likely
have a much bigger and lasting impact on the pair.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

• We are evidence-based
• Inflation dynamics in the UK are different to that in the US
• There is always volatility when it comes to the data
• We can’t not look at the labour market, even with the latest ONS data shortcomings
• There is no law that says the Fed must move first before other central banks
• One rate cut will still leave us with restrictive monetary policy
• We do not have a very precise view on where rates will end up (Broadbent)

There doesn’t seem to be much added spice in the Q&A here. I will update the post if there’s anything else but I reckon that’s about it in terms of significant headlines from the BOE today.

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

• But it is encouraging that inflation will be close to target in the coming months
• Higher than expected wage and services inflation since February should give us pause for thought
• But we should not overinterpret it, they are well within the normal margins of variance
• Change in bank rate in June is neither ruled out nor a fait accompli
• Inflation persistence outlook is similar to February
• More data will help to assess outlook on CPI inflation
• We are making very good progress in returning inflation to 2% target
• Restrictive monetary policy stance is working
• It is likely we will need to cut bank rate over the coming quarters
• It is also possible to cut more than what is currently priced into market rates
• We have no preconceptions on how far or how fast we will cut rates

It is interesting that he wants to try to keep June on the table. There will be two CPI reports prior to the meeting on 20 June, but the last one will only leave them with a day to think things over. I doubt we’ll see that much progress to warrant a majority vote for a rate cut by then.

GBP/USD slowly pared losses to around 1.2480 before Bailey mentioned that they might cut more than what markets are pricing in. That is sending the pair down to 1.2455 again.

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

The BoE made another step towards rate cuts with a negative revision to inflation forecasts and Ramsden joining Dhingra for a rate cut.

Not big surprises but the addition of the line saying „will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding“ suggests that the BoE might even cut in June if we get downside surprises in the inflation figures. The next data to watch will be the labour market report on May 14 and the CPI data on May 22.

This article was written by Giuseppe Dellamotta at www.forexlive.com.

It’s all about the little things in the BOE policy decision here today. Let’s summarise what they are.

1. They added one new line to the forward guidance, noting that they will be watching carefully the developments on how inflation persistence will be receding. The key word there being receding of course.
2. We saw Ramsden join Dhingra in voting for a rate cut at this latest meeting. So, one isn’t the loneliest number anymore when it comes to the bank rate vote at least.
3. The BOE itself has lowered its inflation forecasts compared to February, signaling that they are growing more confident on the outlook – at least for now. But then again, these are just forecasts.
4. There’s a side remark from BOE governor Bailey stating that recent news on inflation has been „encouraging“ and that he is „optimistic that things are moving in the right direction“.

These aren’t anything major on their own but they do add up. And that perhaps explains the pound’s initial reaction, which is a drop across the board. GBP/USD fell from 1.2490 to 1.2450 but is running into a minor support:

As much as the little things do add up, they are still just little things at the end of the day. I don’t see this as producing much of a meaningful shift to the BOE outlook. And the rates market is also helping to convince of that with August still the favourite for the BOE to start cutting rates.

The total rate cuts priced in for the year is little changed at ~55 bps currently, just mildly higher from ~53 bps before the decision.

That being said, the near-term chart for GBP/USD above is still one that sees sellers in control. But for a real push towards 1.2300 again, I reckon it needs help from the dollar side of the equation. As much as the near-term bearish bias is sustained, it’s hard to imagine a much steeper drop in sterling just off this alone.

In looking at the dollar though, we might have to wait until the slew of US data next week before anything major though.

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

• Prior 5.25%
• Bank rate vote 7-0-2 vs 8-0-1 expected (Dhingra, Ramsden voted to cut by 25 bps)
• CPI inflation is expected to return to close to the 2% target in the near-term
• But it is to increase slightly in the second half of this year, owing to the unwinding of base effects
• There continue to be upside risks to the near-term inflation outlook from geopolitical factors
• Key indicators of inflation persistence are moderating broadly as expected, although they remain elevated
• Monetary policy will need to remain restrictive for sufficiently long to return inflation to the 2% target
• Monetary policy needs to be restrictive for an extended period of time until the risk of inflation becoming embedded above the 2% target dissipates
• Prepared to adjust monetary policy as warranted by economic data to return inflation to the 2% target sustainably
• Will consider forthcoming data releases and how these inform the assessment that the risks from inflation persistence are receding
• Will keep under review for how long Bank Rate should be maintained at its current level
• Full statement

The only real addition to the forward guidance passage is the one highlighted in bold. Do take note at how that particular addition only highlights the risks to inflation persistence ‚receding‘. It’s another step towards angling for a rate cut but not exactly a really big one.

Besides that, the bank rate vote also sees Ramsden join Dhingra in opting for a rate cut. So, that’s also a slightly more dovish outcome.

The BOE has also lowered its inflation forecasts, seeing inflation at 2.6% in one year’s time (previously 2.8%), 1.9% in two years‘ time (previously 2.3%), and 1.6% in three years‘ time (previously 1.9%).

Other than that, the rest of the language are as what one can expect. Or at least I would argue it that way. The pound has fallen though, with perhaps the slightest of dovish takeaways above helping. GBP/USD is down to 1.2450 from around 1.2490 before the decision.

Bailey’s comments might also be playing a small part as he says that recent news on inflation has been „encouraging“ and that he is „optimistic that things are moving in the right direction“.

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