Focus Turns to Sterling Weakness and BoE
Despite some mixed economic data, dollar ended the week as the second strongest major currency, next to yen. Markets seem now believe that barring further turmoils in the financial markets, Fed is still on schedule to hike interest rate this year. September still remains unlikely but chances are for a hike in October. And the expectation is supported by an overall well received non-farm payroll report. Despite the miss in headline job growth number, fall in unemployment rate and acceleration in wage growth were seen as positive. Also, comments from Fed officials were supportive to such expectations. Australian dollar and New Zealand dollar remained the weakest ones. Canadian dollar was firm as WTI crude oil maintained gains and steadied around 46. European majors were mixed with notable weakness seen in Sterling.
We mentioned last week that stock markets sentiments should have stabilized and markets should be in a consolidation that. Last week's developments were inline with our expectations. We'd expect DJIA to consolidate around 16000-16500, with prospect of a rebound further to 17000. The China Shanghai A share index would likely consolidate around 3000/3500. Stabilization in stocks would help provide support to the greenback, which would likely stay firm ahead of FOMC meeting on September 16/17. We'd expect DJIA to consolidate around 16000-16500, with prospect of a rebound further to 17000. The China Shanghai A share index would likely consolidate around 3000/3500.
Focus will be off US this week and be turned to key events in other countries. That includes BoC, RBNZ and BoE rate decisions. Canadian dollar was helped by recovery in oil prices and could have a stronger rebound if BoC sounds less negative on oil prices. RBNZ is expected to cut OCR by 25bps to 2.75% and could give the Kiwi additional pressure. Australian dollar will also faces some test from its down employment data and China data.
The bigger market mover could be found in Sterling. The pound was one of the biggest gainer back in August but sentiments had a sharp turn recently. Ian McCafferty voted for a rate hike last month as BoE left interest rate unchanged. Markets are expecting the same decision this week. However, if Ian McCafferty changes his mind in this week's vote, Sterling would be under some heavy selling pressure.
Technical outlook in sterling isn't too well neither. GBP/USD's fall last week confirm that recent rebound from 1.4565 has completed at 1.5929 already. The fall from 1.5929 could represent a leg of the consolidation pattern from 1.4565, or resumption of later down trend. In either case, a retest of 1.4565 support could be seen. The sharp fall in GBP/JPY also opened up the case for medium term trend reversal. A test on 174.86 support could be seen in near term even in the less bearish case. EUR/GBP engaged in sideway trading below 0.7421 last week but stayed well above 0.7169 support. The bull ness outlook in the cross was maintained and further rise should be seen to 0.7482 resistance and above on a breakout.
Regarding trading strategies, our bearish view on GBP/USD last week was correct but we played it too safe. GBP/USD just recovered to 1.5436 and well below our entry level of 1.5500. Thus, we missed the run. Based on above views, we'll try to sell Sterling again this week. Aussie will be avoided as it could be even weaker. Canadian dollar will also be avoided as crude oil is pressing 55 days EMA at around 47.7. EUR/USD looks vulnerable to break of 1.0807 support this week and could head back to 1.0461 low in near term. Thus, we'd prefer dollar over Euro. Meanwhile, yen is preferred over dollar for mild weakness in USD/JPY. Indeed, EUR/JPY and GBP/JPY have both taken out near term support level already while USD/JPY would likely have a test on 116.13.
So, to conclude, we'll sell GBP/JPY at market this week with a stop at 185.00. 174.86 is our first target and we'll trail stop down as the move extends. Reactions from 174.86 will be closely watched as firm break there would confirm trend reversal and open up the opportunity to fall to 160-ish levels.