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GBP/USD: What's Happening with the UK Economy?
As is known, following the meeting that concluded on February 1, the Bank of England (BoE) announced the maintenance of the bank rate at the previous level of 5.25%. The accompanying statement mentioned that "more evidence is needed that the Consumer Price Index will fall to 2.0% and remain at that level before considering rate cuts."
On February 15, Catharine Mann, a member of the Monetary Policy Committee (MPC) of the regulator, provided the most comprehensive overview of the state of the British economy, including aspects concerning inflation. The key points of her analysis were as follows: "The latest GDP data confirm that the second half of 2023 was weak. However, GDP data is a rearview mirror. On the other hand, the Purchasing Managers' Index (PMI) and other leading indicators look promising. The unemployment rate in the UK remains relatively low, and the labour market continues to be tight. Wage growth is slowing, but the pace remains problematic for the target Consumer Price Index (CPI) indicator. In the UK, goods prices may become deflationary at some point, but not on a long-term basis. Inflation in the UK's services sector is much more persistent than in the EU or the US." Consequently, Catharine Mann's conclusion was: "Mitigating the sources of inflation will be crucial in decision-making" and "Before making a decision on further actions, the Bank of England needs to receive at least one more inflation report."
Referring to specific figures, the latest data from the Office for National Statistics (ONS), published on February 16, showed that retail sales in the UK in January increased by 3.4% against the expected 1.5% and a decline of -3.3% in December (month-on-month). The core figure (excluding automotive fuel retail sales) rose by 3.2% over the month against a forecast of 1.7% and -3.5% in December. On an annual basis, retail sales also showed growth of 0.7% against the expected decline of -1.4% and a December figure of -2.4%.
Labour market data also supports the pound. The unemployment rate fell to 3.8% from 4.2%, against expectations of 4.0%. The reduction in the number of active job seekers in the labour market intensifies competition among employers, which helps maintain a higher wage growth rate. For the three months to December, wage growth was 5.8%. Such strong labour market statistics, complemented by high inflation (CPI 4.0% year-on-year, core CPI 5.1% year-on-year), are likely to push back the anticipated date for easing the Bank of England's monetary policy. Many analysts do not rule out that ultimately, the BoE may be among the last mega-regulators to cut rates this year.
GBP/USD ended the week at the level of 1.2599. According to economists at Scotiabank, the 1.2500 zone represents strong long-term support for it, and a confident move above 1.2610 will strengthen the pound and set GBP/USD on a growth path towards 1.2700. Regarding the median forecast of analysts for the coming days, 65% voted for the pair's decline, 20% for its rise, and the remaining 15% maintained neutrality. Among the oscillators on D1, 75% point south, the remaining 25% look east, with none willing to move north. The situation is different with trend indicators, where there is a slight bias in favour of the British currency – 60% indicate north, while the remaining 40% point south. If the pair moves south, it will encounter support levels and zones at 1.2570, 1.2500-1.2535, 1.2450, 1.2370, 1.2330, 1.2185, 1.2070-1.2090, 1.2035. In case of an increase, the pair will meet resistance at levels 1.2635, 1.2695-1.2725, 1.2775-1.2820, 1.2880, 1.2940, 1.3000, and 1.3140-1.3150.
Thursday, February 22 stands out in the calendar for the upcoming week. On this day, a batch of data on business activity (PMI) in various sectors of the economy of the United Kingdom will be released. The release of other significant macroeconomic statistics in the coming days is not anticipated.
USD/JPY: The Flight Continues
On Tuesday, February 13, USD/JPY reached another local maximum at 150.88. The Japanese currency retreated again, this time against the backdrop of inflation data in the US. The yen also continues to be under pressure due to the Bank of Japan's (BoJ) consistent dovish stance. On February 8, Deputy Governor Shinichi Uchida expressed doubts that the regulator would start to quickly raise its benchmark rate anytime soon. Last Friday, February 16, BoJ Governor Kazuo Ueda spoke in a similar vein. He stated that the issue of maintaining or changing monetary policy, including the negative interest rate, would only be considered "when there is a chance of sustainable and stable achievement of the price level target." Ueda declined to comment on short-term fluctuations in the exchange rate and the factors behind these movements.
In general, there's nothing new. However, many analysts continue to hope that in 2024 the Bank of Japan will finally decide to tighten its monetary policy. "We believe," write economists at the Swiss financial holding UBS, "that the normalization of the Bank of Japan's policy this year will occur against the backdrop of strong negotiations on wage increases and corporate profitability. We still believe that the Japanese yen is likely at a turning point after significant depreciation from 2021 to 2023. Considering that the yield differential between 10-year U.S. and Japanese bonds will narrow over the year, we believe the current entry point for buying yen is attractive."
A similar position is held at Danske Bank, where they forecast a sustainable decrease in USD/JPY below 140.00 on a 12-month horizon. "This is primarily because we expect limited growth in yields in the US," say strategists at this bank. "Therefore, we expect the yield differential to become a tailwind for the yen throughout the year, as the G10 central banks, with the exception of the Bank of Japan, are likely to start rate-cutting cycles."
Regarding the short-term outlook, specialists at Singapore's United Overseas Bank Limited believe that the dollar still has the potential to test 151.00 before weakening. "The risk of the US dollar rising to 152.00 will remain unchanged as long as it stays above 149.55," UOB states. This position is supported by only 25% of experts, with the majority (60%) already siding with the yen, and the remaining 15% preferring to maintain neutrality. Among the trend indicators and oscillators on D1, all 100% point north, however, 25% of the latter are in the overbought zone. The nearest support level is located in the zone of 149.65, followed by 148.25-148.40, 147.65, 146.65-146.85, 144.90-145.30, 143.40-143.75, 142.20, 140.25-140.60. Resistance levels are located at the following levels and zones - 150.65-150.90, 151.70-152.00.
No significant events related to the Japanese economy are scheduled for the upcoming week. Moreover, it is important to note that Friday, February 23, is a public holiday in Japan: the country observes the Emperor's Birthday.
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As is known, following the meeting that concluded on February 1, the Bank of England (BoE) announced the maintenance of the bank rate at the previous level of 5.25%. The accompanying statement mentioned that "more evidence is needed that the Consumer Price Index will fall to 2.0% and remain at that level before considering rate cuts."
On February 15, Catharine Mann, a member of the Monetary Policy Committee (MPC) of the regulator, provided the most comprehensive overview of the state of the British economy, including aspects concerning inflation. The key points of her analysis were as follows: "The latest GDP data confirm that the second half of 2023 was weak. However, GDP data is a rearview mirror. On the other hand, the Purchasing Managers' Index (PMI) and other leading indicators look promising. The unemployment rate in the UK remains relatively low, and the labour market continues to be tight. Wage growth is slowing, but the pace remains problematic for the target Consumer Price Index (CPI) indicator. In the UK, goods prices may become deflationary at some point, but not on a long-term basis. Inflation in the UK's services sector is much more persistent than in the EU or the US." Consequently, Catharine Mann's conclusion was: "Mitigating the sources of inflation will be crucial in decision-making" and "Before making a decision on further actions, the Bank of England needs to receive at least one more inflation report."
Referring to specific figures, the latest data from the Office for National Statistics (ONS), published on February 16, showed that retail sales in the UK in January increased by 3.4% against the expected 1.5% and a decline of -3.3% in December (month-on-month). The core figure (excluding automotive fuel retail sales) rose by 3.2% over the month against a forecast of 1.7% and -3.5% in December. On an annual basis, retail sales also showed growth of 0.7% against the expected decline of -1.4% and a December figure of -2.4%.
Labour market data also supports the pound. The unemployment rate fell to 3.8% from 4.2%, against expectations of 4.0%. The reduction in the number of active job seekers in the labour market intensifies competition among employers, which helps maintain a higher wage growth rate. For the three months to December, wage growth was 5.8%. Such strong labour market statistics, complemented by high inflation (CPI 4.0% year-on-year, core CPI 5.1% year-on-year), are likely to push back the anticipated date for easing the Bank of England's monetary policy. Many analysts do not rule out that ultimately, the BoE may be among the last mega-regulators to cut rates this year.
GBP/USD ended the week at the level of 1.2599. According to economists at Scotiabank, the 1.2500 zone represents strong long-term support for it, and a confident move above 1.2610 will strengthen the pound and set GBP/USD on a growth path towards 1.2700. Regarding the median forecast of analysts for the coming days, 65% voted for the pair's decline, 20% for its rise, and the remaining 15% maintained neutrality. Among the oscillators on D1, 75% point south, the remaining 25% look east, with none willing to move north. The situation is different with trend indicators, where there is a slight bias in favour of the British currency – 60% indicate north, while the remaining 40% point south. If the pair moves south, it will encounter support levels and zones at 1.2570, 1.2500-1.2535, 1.2450, 1.2370, 1.2330, 1.2185, 1.2070-1.2090, 1.2035. In case of an increase, the pair will meet resistance at levels 1.2635, 1.2695-1.2725, 1.2775-1.2820, 1.2880, 1.2940, 1.3000, and 1.3140-1.3150.
Thursday, February 22 stands out in the calendar for the upcoming week. On this day, a batch of data on business activity (PMI) in various sectors of the economy of the United Kingdom will be released. The release of other significant macroeconomic statistics in the coming days is not anticipated.
USD/JPY: The Flight Continues
On Tuesday, February 13, USD/JPY reached another local maximum at 150.88. The Japanese currency retreated again, this time against the backdrop of inflation data in the US. The yen also continues to be under pressure due to the Bank of Japan's (BoJ) consistent dovish stance. On February 8, Deputy Governor Shinichi Uchida expressed doubts that the regulator would start to quickly raise its benchmark rate anytime soon. Last Friday, February 16, BoJ Governor Kazuo Ueda spoke in a similar vein. He stated that the issue of maintaining or changing monetary policy, including the negative interest rate, would only be considered "when there is a chance of sustainable and stable achievement of the price level target." Ueda declined to comment on short-term fluctuations in the exchange rate and the factors behind these movements.
In general, there's nothing new. However, many analysts continue to hope that in 2024 the Bank of Japan will finally decide to tighten its monetary policy. "We believe," write economists at the Swiss financial holding UBS, "that the normalization of the Bank of Japan's policy this year will occur against the backdrop of strong negotiations on wage increases and corporate profitability. We still believe that the Japanese yen is likely at a turning point after significant depreciation from 2021 to 2023. Considering that the yield differential between 10-year U.S. and Japanese bonds will narrow over the year, we believe the current entry point for buying yen is attractive."
A similar position is held at Danske Bank, where they forecast a sustainable decrease in USD/JPY below 140.00 on a 12-month horizon. "This is primarily because we expect limited growth in yields in the US," say strategists at this bank. "Therefore, we expect the yield differential to become a tailwind for the yen throughout the year, as the G10 central banks, with the exception of the Bank of Japan, are likely to start rate-cutting cycles."
Regarding the short-term outlook, specialists at Singapore's United Overseas Bank Limited believe that the dollar still has the potential to test 151.00 before weakening. "The risk of the US dollar rising to 152.00 will remain unchanged as long as it stays above 149.55," UOB states. This position is supported by only 25% of experts, with the majority (60%) already siding with the yen, and the remaining 15% preferring to maintain neutrality. Among the trend indicators and oscillators on D1, all 100% point north, however, 25% of the latter are in the overbought zone. The nearest support level is located in the zone of 149.65, followed by 148.25-148.40, 147.65, 146.65-146.85, 144.90-145.30, 143.40-143.75, 142.20, 140.25-140.60. Resistance levels are located at the following levels and zones - 150.65-150.90, 151.70-152.00.
No significant events related to the Japanese economy are scheduled for the upcoming week. Moreover, it is important to note that Friday, February 23, is a public holiday in Japan: the country observes the Emperor's Birthday.
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