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Bank of England Cuts Rates in 7 Years

A guest post written by DAR Wong

Currency Market Observations – 08 August 2016

Fundamental Outlook

The U.S. non-farm payroll increases better than forecast and lure rate hike in coming months. Japan increases new fiscal stimulus but the new program undermines from market expectation. Bank of England cuts rates after 7 years and raises bond purchase program, in a bid to steer away from BREXIT effects.

The U.S. Institute of Supply Management reports manufacturing index at 52.6 in July and lower from 53.2 in June. Construction spending dropped 0.6 percent in June and remained sluggish.

The U.S. Institute of Supply Management reports services index at 55.5 in July compared to 56.5 in previous month. Crude inventories for the week ended 30 July increased to 1.4 million barrels and higher than forecast, putting lid on oil prices. Personal spending stagnated at 0.4 percent growth in June.

Another separate report on American weekly jobless claims rose by 269,000 in the week ended 30 July and highest in 1 month’s record. The monthly non-farm payroll in July rose 225,000 amid higher than expectation, spurring market to anticipate an imminent rate hike in coming months. Jobless rates remained at 4.9 percent and unchanged from prior month.

China’s manufacturing index slid to 49.9 in July and first time in 5 months going below 50.0 levels, indicating potential slowdown. Caixin service index reported by Markit grew to 51.7 in July compared to 52.7 in June, signalling expansion above 50.0 benchmarks.

Japan’s consumer confidence rose at 41.3 in July and lower than 41.8 in previous month. Yen ash been strengthening since 2 weeks ago after Bank of Japan disappointed the market of no expansion in money supply to reduce Yen.

However, Japan’s Prime Minister Shinzo Abe’s cabinet approved JPY13.5 trillion (USD132.04 billion) in fiscal measures on last Tuesday in order to revive slowdown, paying cash incentives to low-income earners and infrastructure spending. The package divides JPY7.5 trillion in government spending and balance JPY6 trillion into Fiscal Investment and Loan Program, hence put off the confidence in market investors again, without plan to expedite exports.

Producer prices in Eurozone rose 0.7 percent in June and best record in this year, signalling growth in manufacturing. The German services index rose to 54.4 in July while Eurozone services index stayed at 52.9, both matched the forecast.

U.K. construction index maintained at 45.9 in July and slightly better than forecast. Markit reports U.K. manufacturing index dropped to 48.2 in July, making second consecutive month below 50.0 levels. Another report on service index for July stayed little changed at 47.7 and also matched the forecast.

Last Thursday, Bank of England cut rates by 0.25 percent for the first time in over 7 years, slashed growth forecast and launched a new monetary policy weapon to steer away from potential slowdown. Policymakers say they will create a new Term Funding Scheme worth up to GBP100 billion (USD132 billion) and announce the purchase of up to 10 billion pounds in U.K. corporate bonds. The government bond-buying program will be raised to GBP435 billion.

Technical Forecast

USD/JPY hovered at 101.00 regions last week while some bargain-hunting came into market. This week, we reckon the trend will recovery at 103.50 areas due to short-covering. Breaking below 100.50 levels will pose danger to explore below 100.00 benchmarks though we discount such possibility for the time being.

EUR/USD topped off 1.1230 higher last week and looks bearish now. This week. The trend may bottom out at 1.0970 areas before reversing up. Sideways trend is expected from 1.0970 to 1.1150 ranges but piercing beneath 1.0970 may trigger danger in new selling pressure.

GBP/USD dropped after BOE cut rates last week. Support is seen at 1.3050 regions and probably reverse the trend upward this week. Topside potential is seen at 1.3500 areas in case of northern direction but sinking beneath 1.3050 might explore 1.2850 bottoms.

Dar Wong

This post is contributed by OPF Guest Blogger, DAR Wong.

DAR Wong is a registered fund manager in Singapore with 26 years of global trading experiences. You may reach him at dar@pwforex.com

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DISCLAIMER: This post is written for general information only. The author, publisher and/or any third party involved in the distribution of this work assume no legal responsibilities and shall have no liability whatsoever for any direct or consequential losses, costs or expenses arising from the use of the information contained herein.

 






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