US Session Forex Brief, June 20 – The Bank of England Remains Dovish on the Economy

Posted Thursday, June 20, 2019 by
Skerdian Meta • 4 min read

Yesterday was finally the time for the FED meeting that everyone was waiting for. Certain sectors of the US economy have weakened considerably in the last few months, suggesting that the US economy is catching up with the rest of the globe in this economic slowdown that has set foot in all developed counties. As a result, the odds of a rate cut in July increased to nearly 90% in the last few weeks and today after the FED meeting, those odds have gone up to 100%, which means that a rate cut is a done deal for next month. The USD turned dovish again and has been declining during the Asian and the European sessions today. On the other hand, safe havens are on the climb, with USD/JPY diving below 108 while GOLD broke lat year’s highs.

Today it was the turn for the Bank of England to turn bearish. The retail sales report from Britain released this morning showed a 0.5% in sales during May, while April was revised lower to -0.1%, which means two negative months in a row. There was no move expected in interest rates from the BOE today, but after rate cuts from a few major central banks recently, there was the possibility of the BOE delivering a surprising rate cut, but they didn’t. Instead, they sounded increasingly dovish regarding economic growth, which has turned the GBP bearish in the last couple of hours. So, all major central banks are dovish now.

European Session

  • UK Retail Sales – Retail sales report from the UK was released this morning and they showed a 0.5% decline in May as anticipated. April was revised lower as well, from 0.0% to -0.1%. Retail sales YoY missed as well, coming at +2.3% vs +2.7% y/y expected. Core retail sales MoM excluding autos and fuel -0.3% vs -0.4% expected. Core sales for April Prior were revised to -0.3% from -0.2%. Core retail sales excluding autos and fuel come at +2.2% vs +2.5% expected YoY.
  • ECB’s De Guindos Speaking – The ECB vice president, Luis de Guindos, commented this morning that the Euro area economic risks clearly tilted to the downside. De Guindos says that inflation is to deteriorate in the coming months. The ECB is prepared to act if deterioration continues with indicators pointing to very moderate global growth. The central bank is focused on inflation, not market reaction. He ended the speech by saying that rate cuts are only a possibility for now.
  • The Drone Incident in Iran – A drone was shot down somewhere in Iran or close to its border, which hurt the sentiment further in financial markets and sent Crude Oil more than $2.5 higher. Iran said that downing of US drone sends a clear message to Washington. Tehran will react strongly against any aggression and the borders are Iran’s red line. Although, the US denies that its drone flew into Iranian airspace.
  • ECB’S Rehn – The European Central Bank Governing Council Olly Rehn commented this morning. Rehn warned that the persistent trade tensions risk becoming a global currency war. The US is not completely innocent to these developments. It will be even worse if we would have a currency war. We should all try to avoid these kind of developments.
  • No Other Brexit Solution From the Dutch PM Rutte – Dutch prime minister, Mark Rutte, said that there is no other solution to Brexit than the current arrangement. The EU can’t make changes to withdrawal agreement, further Brexit extension would need a credible plan from the next UK prime minister. If there are no changes to UK’s position, can’t see sense in further negotiations. Brexit will have a ‘huge impact’ on the UK economy, society, and the UK on its own is not big enough to be a global force but only a regional one.

US Session

  • BOE Interest rate Decision – The Bank of England delivered its interest rate decision, leaving them unchanged at 0.75% as expected. Official bank rate votes remained unchanged from the last meeting at 0-0-9 in favour of keeping them unchanged vs 0-0-9 expected. Asset purchase target remains unchanged as well at £435 billion, as does the Corporate bond target at £10 billion. There was a possibility of a surprise rate cut after many major central banks turned bearish, but not this time.
  • Bank of England Monetary Policy Summary – The BOE released the monetary policy statement and cut Q2 GDP forecast to 0.0% from +0.2% q/q previously estimated. “Ongoing tightening of monetary policy at gradual and limited pace is needed”. This comment looks a bit hawkish, but this scenario assumes a smooth Brexit, which I don’t think will happen now that Theresa May is out. CPI likely to fall below 2% target later this year, but inflation expectations remain well-anchored. BOE sees increasing signs that wage growth rates might have leveled off. Underlying economic growth in the UK appears to have weakened slightly in H1 2019. Downside risks have increased since May as global trade tensions intensify. The GBP has turned lower and lost more than 40 pips on comments about the economic growth which is stagnating.
  • Philly Fed Manufacturing Index – This indicator has been pretty volatile and in February it even fell into negative territory coming at -4.1 points. Although, it increased again and last month this indicator stood at 16.6 points. This month the Philly Fed manufacturing index was expected to cool off to 10.6 points, but it missed expectations falling to 0.3 points.
  • US Unemployment Claims – The unemployment claims have been in the range of 210k-220k during the last five weeks. Although, last week the unemployment claims were revised higher to 222k from 215k previously. This week, claims were expected to cool off and fall to 220k but they beat expectations falling to 215k, so back into the range.

Bearish USD/JPY

  1. The pressure is on the downside
  2. Fundamentals are bearish
  3. The pullback higher is complete
  4. The 100 SMA provided solid resistance today

The price is reversing at the 100 SMA

USD/JPY has been bearish for a couple of months now since it reversed down as the trade war escalated several weeks ago. The sentiment remains pretty negative across the markets which increases bids for safe havens such as the JPY. Overnight, this pair slipped lower but it retraced back up during the European session. But that retrace is complete now as stochastic indicator suggests. The 100 SMA (red) provided resistance earlier today and the previous candlestick closed as a doji which is a reversing signal. The reverse down is already happening, so we have a bearish bias for this pair.

In Conclusion

The inflation report from Britain this morning was positive despite a small cool-off. Markets were expecting a worse report. The inflation report from Canada was even better, so both these currencies have been climbing higher today. But, that won’t last too long as the FED meeting is approaching, which we will cover live.

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