BoE in Focus – Market Insight for the Week Ending 23 June

Out of the UK, we have inflation numbers on Wednesday, followed by the Bank of England (BoE) rate decision on Thursday. These will be two key events for the week ahead. Economists on Bloomberg are widely anticipating another 25 basis-point increase from the BoE this week, which would pull the Official Bank Rate to 4.75% (median estimate) and mark the 13^th consecutive rate hike since December 2021. As you can see from the Bloomberg’s distribution curve below, the forecast range currently sits between a high of 4.75% and a low of 4.5%.

Bloomberg (Distribution Curve for BoE Rate Decision Estimates)

Markets are also currently pricing in a 90% probability that the BoE will hike by 25 basis points, and are also pricing in a terminal rate north of 5.75% by the year-end which implies the market is forecasting another five-six rate hikes. While a rate decision is almost unanimous across the market, the question, however, will be whether the BoE deviates from investors’ expectations. It is unlikely that the decision to raise rates will be unanimous among policy officials; May’s decision saw policymakers vote 7-2 in favour of policy firming: MPC members Silvana Tenreyro and Swati Dhingra voted to hold the Bank Rate at 4.5%.

There is growing concerns in the UK housing sector; several prominent lenders have pulled cheaper deals (HSBC, for example, increased mortgage rates twice in a week). Homeowners are confronting the reality of higher mortgage payments in the months ahead as they switch from lower fixed-rate deals to higher rates, which could ultimately slow consumer spending in the economy. According to the FT, UK households that come to the end of fixed-rate mortgage deals next year face an average £2,900 increase in annual payments. Ultimately, this is likely to see the BoE continue to adopt a cautious stance.

Wages and Inflation are also concerning for the UK. Wage growth (excluding bonuses) accelerated in the February-April quarter, running around 7.2%: a very tight labour market. Regarding inflation, according to the Office for National Statistics (ONS), headline YoY inflation eased into single digits in April at 8.7%, down from 10.1% in March (this is still more than four times the BoE’s inflation target and was higher than economists’ estimates [8.3%]). While the slowdown in consumer prices is somewhat positive, core YoY inflation remains a concern. Recent core inflation (removes volatile components such as food and energy) came in above economists’ estimates (6.2%) at 6.8% for April. Wednesday will see the latest UK inflation numbers. Expectations are for headline inflation (YoY) in May to slow to 8.5% (median estimate) with a forecast range between 8.8% and 8.0%. Nevertheless, core YoY inflation for May is anticipated to remain unchanged at 6.8% (forecast range falls in between 6.9% and 6.5%). This core measure will be a notable talking point, particularly if we see a substantial deviation.

In terms of market reaction, sterling is unlikely to respond much to a 25 basis-point hike, unless a deviation from the expectation is observed, of course. With that being said, a more noticeable reaction is likely to be seen from what is said/not said in the accompanying statement and what is printed in the BoE’s economic projections. I have also added a technical view for the GBP/USD heading into the week. Notably, the currency pair printed its largest one-week advance this year last week and touched gloves with YTD tops. Gilts will also be widely watched this week. The short-dated 2-year Gilt yield rose 0.23 percentage points to its highest level since 2008 on Tuesday, touching a high of around 4.9% and eclipsing the mini-budget crisis in September last year as investors purchased bonds at higher rates.

Other economic events to be mindful of this week are the minutes out of the Reserve Bank of Australia (RBA) on Tuesday, as well as US housing data later in the session. In addition to UK inflation on Wednesday, we will also see Fed Chair Powell testify on Wednesday (and Thursday).

Thursday, alongside the BoE rate decision, markets will also welcome the Swiss National Bank (SNB) rate decision—expected to raise the Official Policy Rate by 50 basis points—US unemployment claims and existing home sales data. Finally on Friday, flash manufacturing and services PMIs across Europe, the UK and the US will be released.

As a reminder, US banks will be closed in observance of Juneteenth on Monday, which could see thin liquidity and potentially irregular volatility.

Technical View: Markets to Watch for the Week Ahead

Currencies:

Lower Levels for the Dollar Index?

The US dollar—according to the US Dollar Index—fell -1.2% last week, recording its largest one-day slump since January this year. MTD, the buck is also down -1.9%.

We have an interesting clash of timeframes regarding trend direction for the US dollar. The monthly timeframe has been climbing since early 2008. The current correction that begun in Q4 of 2022 has dropped around -12% (thus far), a touch shy of the previous correction seen in 2017 of around -15%. Extending the current correction could land monthly price at support from 99.67, a level complemented by two Fibonacci ratios (38.2% and 61.8%) at 98.72 and 98.95, respectively. Therefore, this is an area that may offer a floor to work with in the weeks to come, assuming further downside occurs. The daily timeframe, on the other hand, is trending southbound, both in the longer term (from the peak of 114.78) and in the short term from the peak of 104.70. With room to press lower on the monthly scale to support from 99.67 and the daily timeframe trending lower, additional underperformance is likely for the greenback.

Adding to the bearish vibe, price action on the daily timeframe elbowed south of the 50-day simple moving average on Thursday, currently fluctuating at 102.60 (a move highlighting daily demand from 100.27-100.77). In terms of the Relative Strength Index (RSI), the monthly chart shows the indicator nearing the 50.00 centreline, sharing space with an indicator trendline resistance-turned-support taken from the high of 79.96. From the daily timeframe, however, we are firmly south of the 50.00 centreline and closing in on oversold territory (negative momentum).

Overall, while a pullback is not out of the question on the daily scale this week (50-day SMA could deliver dynamic resistance), the technical pendulum is swinging in favour of further selling over the coming weeks.

GBP/USD Records Largest One-Week Gain this Year

Sterling soared higher last week, adding +1.9% against the US dollar and refreshing YTD highs at $1.2848. In one fell swoop, GBP/USD cruised through trendline resistance (taken from the high $1.4250) and resistance at $1.2767 on the weekly scale. MTD, the currency pair is 3.1% higher, and YTD, we are now 6.1% in the green. Continued interest to the upside on the weekly scale has resistance as far north as $1.3134 to target. Meanwhile on the daily timeframe, price ventured through resistance at $1.2665 on Thursday with scope to approach resistance at $1.3001.

In addition to both the weekly and daily timeframes showing room to press beyond recently breached resistances, both timeframes also demonstrate clear technical uptrends. This leaves traders/investors with a bullish picture for the pair this week.

Across the page, H1 price movement—also notably trending north—ended the week above $1.28 after trading within a stone’s throw of resistance at $1.2849. Additional levels of interest this week are support at $1.2777 and at $1.2745, along with resistance calling for attention around $1.2881.

Ultimately, considering the higher timeframes signalling room to explore higher levels this week, H1 price could hold above $1.28 and attempt to overthrow H1 resistance from $1.2849 and refresh YTD tops. Alternatively, a deeper correction could materialise, collecting stops under $1.28 and testing the area around H1 support at $1.2777, which converges closely with potential weekly support at $1.2767 (the recently breached resistance level).

Commodities:

Further Selling for Gold (XAU/USD)?

Spot gold remains an interesting market.

From the weekly timeframe, the key development last week was price clipping the lower edge of support from $1,928-$1,960. This area entered the fray last month, following a near-test of the all-time high of $2,075 in early May. Buyers remain present here, though they have yet to demonstrate much bearing and price touching space below the aforementioned support zone is likely to concern some buyers. I noted in previous analysis that consuming the support zone shines the headlights on support as far south as $1,807. I also added that the weekly chart’s Relative Strength Index (RSI) recently formed a trendline support break and indicates that upside momentum may continue to slow.

Risk of further declines is also evident on the daily timeframe. Channel support taken from the low of $1,616 was breached last week and retested as resistance on Friday. This, coupled with price action remaining south of the 50-day simple moving average at $1,985, may have the yellow metal take aim at support coming in from $1,919. Although the weekly timeframe has been trending higher since bottoming in September 2022 (we are currently in a correction on the weekly scale), the daily chart is in the early stages of a downtrend (basic price structure: lower lows – lower highs) which was reaffirmed with last Thursday forming a fresh lower low at $1,925. There has not been much change on the RSI on the daily chart: the indicator continues to work with space south of the 50.00 centreline, which informs market participants that average losses exceed average gains (negative momentum) and, for now, aligns with the current downtrend on the daily chart.

Shorter term, I see H1 price established a low ($1,953) heading into US trading on Friday (probed beneath an earlier low of $1,954). Together with the mild pullback to form a potential lower high ahead of resistance at $1,960, follow through downside could be seen in the first half of this week. Snapping under $1,953 would also likely wave in short-term breakout sellers, perhaps opening the door to support from $1,940.

As a result of the above—weekly support echoing a vulnerable tone at $1,928-$1,960, along with daily price retesting the underside of channel support as well as H1 price perhaps gearing up to form a lower low—downside could gain speed this week, targeting H1 support from $1,940 as an initial support target.

Equities:

S&P 500: All Three Timeframes Support Buying

Following three months of prior gains, MTD, the S&P 500 is higher by +5.5%.

Aided by the Relative Strength Index (RSI) rebounding from support between 40.00 and 50.00 (common in strong uptrends), monthly price is fast approaching the all-time high at 4,818 set at the beginning of 2022.

Price action on the weekly timeframe consumed resistance at 4,325 (now support) and unmasked a handful of key upside objectives to focus on. The biggest technical challenge here for buyers is channel resistance drawn from the high of 4,100, followed by resistance coming in at 4,598. Also of technical relevance, the RSI is drawing near overbought territory, following a breakout above an ascending triangle pattern in late March (although considered a continuation structure, ascending triangles can also form at reversal points).

The recent surge in buying has been quite something, almost parabolic. The daily chart casts light on resistance from 4,473, a level sheltered south of a Fibonacci cluster around 4,537. Support falls in around 4,381, which if buyers maintain control this week, as suggested by the weekly timeframe, could be a level welcomed by dip-buyers to target daily resistance at 4,473, which happens to align with weekly channel resistance.

Cryptocurrencies:

ETH/USD: Price Action Forecasting Higher Prices?

The 200-day simple moving average served this market well as dynamic support in the second half of last week at $1,638, helped by the daily chart’s trendline support (drawn from the low of $1,074) and the Relative Strength Index (RSI) crossing swords with oversold territory. Follow-through buying on Friday lifted ETH/USD above resistance on the daily timeframe at $1,713, which is now marked as support. Importantly, the unit exhibits scope to extend recovery gains this week; daily resistance calls for attention at $1,872.

Regarding trend on the daily timeframe, direction depends on the scale one focusses on. From the low at $1,074, you could say that the trend is higher and the recent move lower represents a deep correction to trendline support. However, if one concentrates on local swings, the medium-term correction might be viewed as an early downtrend (lower lows/highs).

From a shorter-term perspective, price tested support at $1,622 on Thursday and eventually made its way above $1,700. Interestingly, I see that trendline resistance (taken from the high of $1,897) was taken out in recent trading, somewhat corroborating upside forecasts on the daily timeframe and revealing nearby resistance on the H1 at $1,775. I do, however, see some mild negative divergence forming out of the RSI within overbought space.

Given the above analysis, a retest at trendline resistance-turned-support on the H1 scale might be seen this week, which may align closely with a retest of the $1,713 daily support. Alternatively, leaving trendline support unchallenged, price could confront H1 resistance at $1,775 which may see the unit push for a breakout (in line with the daily timeframe’s technical direction) to take aim at $1,800.

Charts: TradingView

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