Sterling Mixed Reaction to BoE Rate Hike; Yen Climbs With Dollar

Sterling’s response to BoE rate hike has been somewhat ambivalent. Despite BoE’s openness to further tightening and a rosier economic outlook, forecast for inflation indicates a marked downturn, with a “material” undershooting expected in the forecast horizon. The voting pattern held no surprises, leaving the Pound now turning its attention to tomorrow’s GDP data for potential directional cues.

In the broader currency market, Japanese Yen is seeing notable gains in early US session, buoyed by continued decline in US and European treasury yields. Dollar, meanwhile, is capitalizing on risk-off sentiment, as US futures hint at a slightly lower opening. Australian dollar is trailing for the day, with Canadian Dollar and Euro not far behind. However, the final standing will depend on how risk sentiment evolves throughout the remainder of the session.

From a technical standpoint, the spotlight now shifts to whether AUD/USD will break 0.6716 support level, indicating rejection by 0.6804 resistance level. If this occurs, it suggests that the consolidation pattern from 0.6563 may have peaked at 0.6817, paving the way for a resumption of larger decline from 0.7156. If this turns out to be the case, it could signal a reversal in commodity currencies as well as risk sentiment.

US initial jobless claims rose to 264k, highest since Oct 30, 2021

US initial jobless claims rose 22k to 264k in the week ending May 6, above expectation of 245k. That’s the highest level since October 30, 2021. Four-week moving average of initial claims rose 6k to 245k, highest since November 20, 2021.

Continuing claims rose 12k to 1813k in the week ending April 29. Four-week moving average of continuing claims rose 2k to 1830k.

US PPI up 0.2% mom, 2.3% yoy in Apr

US PPI for final demand rose 0.2% mom in April, below expectation of 0.3% mom. 80% of the rise in PPI attributable to a 0.3% mom increase in prices for services. The index for goods advanced 0.2% mom. Prices for final demand less foods, energy, and trade services rose 0.2% mom.

For the 12 months ended in April, PPI slowed from 2.7% yoy to 2.3% yoy, above expectation of 1.4% yoy. PPI less foods, energy, and trade services slowed from 3.4% yoy to 3.2% yoy, above expectation of 2.7% yoy.

BoE hikes 25bps, leaves door open for more

BoE raises Bank Range by 25bps to 4.50% as widely expected. The decision was made by 7-2 vote with known doves Silvana Tenreyro and Swati Dhingra voted for no change.

In the accompanying statement, BoE left open the door for further rate hike, noting that “if there were to be evidence of more persistent (inflation) pressures, then further tightening in monetary policy would be required.”

BoE expects inflation to “fall sharply from April” and decline to “a little above 1% at the two and three-year horizons”. That would be “materially below the 2% target then. “This reflects the emergence of an increasing degree of economic slack and declining external pressures that are expected to reduce CPI inflation,” it added.

Regarding the economy, GDP is expected to be “flat over the first half” of 2023. Economic activity has been “less weak than expected in February”, with the path of demand “materially stronger than expected. Labor market remains tighter than February report.

BoE Bailey: CPI on course to halve by end of year

BoE Governor Andrew Bailey said in the post meeting press conference, “we have to stay the course to make sure inflation falls all the way back to the 2% target.”

Nevertheless he expected the rise in bank rates since December to “weigh more on the economy in the coming quarters”.

Inflation is “expected to fall sharply over the coming months, starting in April.” He added, “consumer price inflation is on course to halve by the end of this year.”

As for the economy, he said, “today we are forecasting modest but positive growth and a much smaller increase in unemployment.”

BoJ opinions: Current monetary easing should continue

In the Summary of Opinions at BoJ’s monetary policy meeting on April 27/28, new governor Kazuo Ueda’s debut, revealed the need to continue with current monetary easing despite improved view on inflation outlook.

One member said “attention is warranted for the time being on the possibility of continued high inflation” while another said “achievement of the price stability target of 2 percent is coming into sight”. Meanwhile, “price projections have been raised somewhat”.

Yet, it’s generally agreed that the central bank “should continue with the current monetary easing,” given that inflation is likely to decline ahead, in the background of heightened uncertainties in overseas economies.

Also it’s reiterated that to achieve the inflation target in “sustainable manner”, it needs to be “accompanied by wage increases”. And it’s “necessary” to continue to “firmly support the momentum for wage hikes through monetary easing “.

There was also cautions that “the risk of missing a chance to achieve the 2 percent target due to a hasty revision to monetary easing is much more significant than the risk of the inflation rate continuing to exceed 2 percent.”

One member noted that there is no need to revise the conduct of yield curve control as “distortions on the yield curve are currently dissipating”.

China’s CPI at 0.1% yoy in Apr, lowest since Feb 2021

China CPI slowed from 0.7% yoy to 0.1% yoy in April, below expectation of 0.3% yoy. That’s the lowest level since February 2021. Core CPI, excluding food and energy, was unchanged a 0.7% yoy.

Within the CPI, food prices in China rose by 0.4 per cent from a year earlier in April, compared with a rise of 2.4 per cent in March, while non-food prices rose by 0.1 per cent last month, year on year, down from an increase of 0.3 per cent in March.

“In April, the market supply was generally adequate, and consumer demand gradually recovered, with the CPI falling by 0.1 per cent from a month earlier and rising by 0.1 per cent, year on year,” said senior NBS statistician Dong Lijuan.”Core CPI, excluding food and energy prices, rose by 0.1 per cent from a month earlier to 0.7 per cent, year on year, up at the same rate as in the previous month.”

PPI dropped from -2.5% yoy to -3.6% yoy, below expectation of -3.2% yoy. PPI fell at the fastest rate since May 2020 and was down for a seventh consecutive month

“In April, PPI fell by 0.5 per cent from a month earlier and by 3.6 per cent, year on year, due to fluctuations in international commodity prices; the overall weakness of the domestic and international market demand; and the higher base of comparison from the same period last year,” Dong added.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2592; (P) 1.2636; (R1) 1.2669; More…

GBP/USD is staying in consolidation below 1.2678 and intraday bias remains neutral for the moment. Further rally is expected as long as 1.2434 support holds. Break of 1.2678 will resume larger up trend to 1.2759 fibonacci level first. Firm break there will target 61.8% projection of 1.0351 to 1.2445 from 1.1801 at 1.3095. However, decisive break of 1.2434 will confirm short term topping, and turn bias back to the downside for deeper fall.

In the bigger picture, the rise from 1.0351 medium term term bottom (2022 low) is in progress for 61.8% retracement of 1.4248 (2021 high) to 1.0351 at 1.2759. Sustained break there will add to the case of long term bullish trend reversal. Further break of 61.8% projection of 1.0351 to 1.2445 from 1.1801 at 1.3095 could prompt upside acceleration to 100% projection at 1.3895. For now, this will remain the favored case as long as 1.1801 support holds, even in case of deep pull back.

Economic Indicators Update