Equities Had Another Good Run, BoE Keeps Interest Rate The Same

Yesterday, most of equity markets were swimming in the green. Although the Asian market was seen closing slightly on the mixed side, Europe picked up the pace and led the way, followed by the US. The US dollar was one of the worst performers yesterday, declining against most of its major counterparts.

Equities Push Higher Again

Yesterday, most of equity markets were swimming in the green. Although the Asian market was seen closing slightly on the mixed side, Europe picked up the pace and led the way, followed by the US. Also, gold established another record high, hitting the 2055 level. As we mentioned in our yesterday’s report, the yellow metal continues to rise together with equities, which is slightly concerning, as this makes the precious metal less of a safe-haven. Instead, that title seems to get passed on to USD instead. Given that gold had already a decent rally, there is a possibility to see a bit of correction, lower, however, we have to wait for a reversal signal first, before starting to examine such an option. If USD starts attracting buying interest, that may send gold for a slight correction lower.

The US dollar was one of the worst performers yesterday, declining against most of its major counterparts. We saw DXY moving further south, which, of course, comes inline with the idea discussed above of accepting the safe-haven status during risk-off periods. If the equities continue to drift further north, at least for a while more, we may expect USD to stay under some selling interest.

BoE Stays With The Same Rate

This morning we have received the Bank of England’s decision on its interest rate. The Monetary Policy Committee voted unanimously and kept the rate at the previous level of +0.1%. One of the reasons is that in June, the BoE announced an additional £100bn asset purchase program to support the economy, which had some positive effects. The relaxed lockdown measures helped bring the economy back to life a bit, but huge headwinds still remain. As of May, the unemployment rate remains at a steady 3.9%. Consumer spending did pick up as well, as many people are eager to get back to their normal lives. This may also put the Committee off from bringing the interest rate further down in the future, especially if those readings continue to satisfy the Bank.

The Monetary Policy Committee will continue monitoring the effects of the coronavirus on the British economy. If a new lockdown will be declared, the Bank will have to quickly apply more stimulus in its strategy. Also, one of the main concerns for the BoE has been the low level of inflation. The headline CPI on a YoY basis, during the past 3 readings, came out even below 1%, which were far from the Banks target of +2.0%. Certainly, one of the measures for trying to raise inflation could be to lower the interest rate. However the rate is already at its historic low of +0.1% and we doubt that the Bank would try to send the rate below zero any time soon. That said, if unemployment starts rising and if consumer spending is not able to stabilise, this may put more pressure on inflation, as it might continue to drift lower. That’s when the BoE might start considering zero rates, or even follow some of their European partners, like Switzerland and Denmark, and go negative. This would be a historic moment for the Bank, as it wouldn’t be a favourable option to refer to.

Later on, UK will produce its construction PMI figure for July, which is forecasted to come out at 57.0. If so, that would be a good increase from the previous 55.3 reading and could help support the British currency.

GBP/JPY — Technical Outlook

Overall, GBP/JPY continues to balance above its short-term upside support line taken from the low of June 30 th. But from the beginning of this week, the pair seems to be coiling up, potentially forming a symmetrical triangle. Until we get a clear breakout through one of the side of the triangle, we will remain neutral.

If the upper side of the aforementioned triangle gets broken, that may invite a few more bulls into the game, potentially lifting the rate to the highest point of July, at 139.20. GBP/JPY might stall there for a bit, or even correct slightly lower. However, if the pair continues to float above the upper side of that triangle, the bulls might try and take advantage of the lower rate and lift it higher. If this time the pair overcomes the 139.20 barrier, this would confirm a forthcoming higher high and the next potential resistance level could be at 139.74, marked by the highest point of June.

Alternatively, if the pair breaks through the lower side of the triangle and moves below the current low of August, at 137.75, that may spark interest in the eyes of more bears. GBP/JPY might then travel to the 137.39 obstacle, a break of which may set the stage for a move to the 136.80 level. That level marks the low of July 31 st.

Euro Stoxx 50 — Technical Outlook

Looking at the technical picture of Euro Stoxx 50 on our 4-hour chart, we can see that the index tried to move higher in the first half of this week, but so far is finding good resistance near the 3293 barrier, from which it corrected a bit lower. The price, however, remains above the 200 EMA, and above the short-term tentative downside resistance line, taken from the high of July 21 st. Some might see all this as a positive for the near-term outlook. For now, we will take a somewhat bullish approach, because we would prefer to see a break above that 3293 barrier first, before getting a bit more comfortable with higher areas.

If, eventually, we do see a strong move above the aforementioned 3293 zone, that would confirm a forthcoming higher high and more buyers may join in. The Euro Stoxx 50 could then get lifted to the 3317 hurdle, a break of which might clear the path to the 3359 level, marked by the low of July 22 nd.

On the downside, if the price suddenly falls below the 200 EMA and the 3233 area, marked near an inside swing high of July 31 stand near an inside swing low of August 4 th, that may lead to further declines, as more bulls may flee the field. The index could then drift to the 3179 obstacle, which if fails to provide support and breaks, might open the door for a move to the 3145 level, which is the lowest point of July.

As for the rest of today’s events

As every week, from the US we will get the initial jobless claims, together with the continuing jobless claims. The current forecast for the initial jobless claims sits at around 1450k, which is very close to the previous reading of 1434k. Lately, the number has stabilised just slightly below 1500k, which some might see as a positive. However, the number is still on the high side, comparing to where it was before mid-March.

Continuing jobless claims remain well above the pre-April levels. The previous reading was at 17018k, when in the end of March it was only around 1800k. The current expectation is for the reading to come out at around 17200k.

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Originally published at https://www.jfdbank.com on August 6, 2020.