Rate Cuts Are “Plausible”
The pound weakened versus the world’s major currencies after another dovish cry from the BOE. Monetary Policy Committee member Michael Saunders says it is plausible the BOE could lower rates at the next meeting. The news is not a surprise, many in the community have been expecting a cut for some time. The UK economy is on shaky ground and the upcoming hard-Brexit is not going to help. There was very little UK-specific data this weak other than steel production, which is down, so traders have very little concrete information to work with.
Regarding the Brexit, PM Boris Johnson is steadfast in his position to take the UK out of the EU on October 31st with out without a deal. It is, in fact, that very pledge that got him elected to Prime Minister to begin with. The EU says they will not renegotiate the deal unless the UK can come up with some other solution to the Irish-Backstop. Even today, EU President Jean-Claude Juncker said it will be the UK’s fault if a no-deal Brexit unfolds.
The GBP/USD slipped on the Saunders news and set a new two week low. The low is below the short-term 30-day EMA and the 1.2325 support line so further downward movement is possible. The indicators are bearish and suggest prices could fall to the nest lower support target. The next lower support target is 1.2200 and likely reached within the next week or so, providing the data next week is still solid. In the U.S. I mean. U.S. PCE prices came out today as well, core PCE prices ticked higher to 1.8% and suggest the FOMC’s easing “cycle” may already be over. A firmer dollar would help accelerate the pounds decline and take it 1.2000.
The EUR/GBP is moving up off of an extreme low set just a week or so ago. The low was driven by strengthening in the pound due to Brexit hopes that were compounded by a generally dovish expectation for the ECB. Now, the ECB has done some QE and my do more but there is a twist. The BOE is about to start cutting rates which could this pair shooting higher. In the near term, I would expect to see the EUR/GBP move up to test resistance near 0.8925. If prices break above the short-term EMA that would be bullish. If resistance is confirmed prices could drop back to 0.8800 very quickly, it just depends on what the BOE does.