Europe strength, UK inflation

We had a lot of data today. Early in the morning, we have seen an outstanding German GDP. The next big announcement was the UK CPI that surprisingly has shown the same reading as the previous one. Followed by this, the German ZEW economic sentiment and the European GDP.At the same time, the central bank governors from the Fed, BCE, BoE, and BoJ were in a communication event hosted by the European Central Bank. Let’s check more in detail what happened with the British Pound and the Euro.

UK inflation data

As I said before, the UK CPI has been released at 9:30. The reading was 3,00%, the same as the September figure. This makes pressure to the Bank of England. Will they raise rates in December? On the other hand, the uncertainty about getting a Brexit deal is growing. If the policymakers don´t reach a deal focused on trade, the British economy will suffer due to the contingency plans from the private companies. In this theoretical scenario, the BoE will be in trouble because the inflation will peak and they have a limited margin to raise the overnight rate due to the high level of debt held by the households. This scenario has a low probability in my opinion.

GBPUSD December 2017 future

     Source: TradingView, GBPUSD Dec 17 futures, daily

Here we can see a bearish trend in the British Pound vs the US Dollar that seems that it’s consolidating and creating a strong resistance around 1.3070. This trend signals the disappointment of the rate rise in the current situation and the uncertainty of Brexit.

     Source: TradingView, GBPUSD Dec 17 futures, 30 min

The reaction of the strong UK CPI has been negative for the GBP in the first two hours after the release. After that, it has recovered. 

    Source: TradingView, GBPUSD Dec 17 futures, daily

The Pound has broken higher while I was writing this post. Head and shoulders confirmed.

European data

Europe has shown its strength with the macroeconomic data today. This morning Germany has released a strong Gross Domestic Product. The GDP (YoY) was in line with the expectations, but the GBP (QoQ) was better than the forecast.

      Source: ZeroHedge, chart taken from Bloomberg

The Geman ZEW economic sentiment was slightly worse than expected, 18.7 vs 20 expected by the analysts. The European GDP growth was in 2.5% and the industrial production 3.3%. These figures confirm the good moment of the European economy.

EURUSD December 2017 future

     Source: TradingView, EURUSD Dec 17, daily

The USD has been raising vs the Euro since September. The European Central Bank has shown its conservative side while the Fed is clearly hawkish. Today the central banks' governors agreed that the economic policy will take part only if the improvement of the economies continues. 

Source: TradingView, EURUSD Dec 17, 30 min

The Euro has rocketed today with the positive data. The strange thing is that we haven’t seen any retracement.

Conclusion

It’s been a good day for the euro but there are some issues to resolve. The main concern is the European inflation is not as high as the BCE would like it. The strengthening of the euro can lead to keeping the inflation low and Draghi knows about it. In the other side, the Bank of England is raising rates in order to fight the inflation.  This is not well seen by the market participants due to the Brexit uncertainty. In the other side of the Atlantic, Janet Yellen confirmed that the Fed will raise rates according to the economic improvement. Working nowadays in a central bank is not easy, considering that they need to be careful with their language, prepare the markets to avoid repercussions on the real economy and guide consumers about the expected outlook. All of these things shouldn't affect your trading but I think macroeconomics is helpful at least to understand the big movements.
Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Effects of the Bank of England rate hike

Introduction

The Bank of England raised the overnight rate from 0.25% to 0.50% yesterday. This is quite significant because it’s the first rate hike in a decade. The inflationary pressure was the key point in this decision. Some members were demanding a rate hike a long time ago. However, in the Bank’s policy statement, they cautioned that further increases in the overnight rate will be gradual and related to the performance of the economy.

My opinion

I understand that they raised the base rate in order to offset the growing inflation. Up to this point, everything is clear. But, considering that the Brexit negotiations haven’t progressed enough, I don’t think that is the best decision at this moment. According to Barnier, the European Chief Negotiator for Brexit, the Brexit talks could take months to progress. So, I think the BoE has taken the initiative to hike the rate as a temporary measure and the Bank’s policy statement confirms that it will be gradual. In the case of a hard Brexit, they can lower the overnight rate again or even support the economy in a different way until getting new trade agreements.

What was the market reaction?

I think the big credit traders and the institutionals thought the same as me. The British Pound plunged. The Long Gilt, the equivalent of the 10 T-Note and the Euro-Bund, rose. The UK interest rates, known as Short Sterling Futures, jumped showing the disappointment of this decision. Let’s see the movements more in detail.

GBPUSD December 2017 future

     Source: TradingView, GBPUSD Dec17 Future, daily

This is a daily chart that shows the scale of the movement yesterday. It opened at 1.3266 and it closed at 1.3071, big drop. Early in the morning was rising and it tested the resistance at 1.3318. After that and driven by the disappointment from the market participants it fell. In its way down, the support at 1.3157 was broken and fell to the next support (1.3063)

     Source: TradingView, GBPUSD Dec17 Future, 30 min

Here you can see in more detail the movement. It was falling in the morning, but when the interest rate hike was announced, the volatility came to play. Usually, if the economy is strong and performing well, an interest rate hike boosts the currency. In that case, the market participants thought that was not the best moment to hike rates.

EURGBP 

      Source: TradingView, EURGBP FXCM CFD, 30 min

This is the Euro vs the British Pound. The reaction was the same. The major movement happened in 30 min this is why I’ve chosen this time frame.

Long Gilt 

     Source: TradingView, Long Gilt OANDA CFD, Daily

The UK 10 Year Bond future made a very technical movement because it respected the resistance at 125.756. It’s true that at this point, and considering the importance of the level, the most part of the traders considered to sell or take profits. But let’s check this better in the following chart:

     Source: TradingView, Long Gilt OANDA CFD, 15 min

I’ve chosen 15 minutes because I can explain better each candle. We can see that was barely flat before the announcement. At 12:00 UK time, as soon as the BoE confirmed the rate hike, this bond rose driven by the buying pressure. I consider the next candle as a Doji pattern because the buyers and the sellers were conflicting. At this point, and due to the big movement, I believe that some firms were taking profits. The next candle broke higher but failed to close above the resistance at 125.75. This level was used to take profits and open short positions because the movement since the announcement was big. Around 14:00, the buyers came to the market helping to close at the highs of the day.

As a curiosity, I would like to share this article from Efinancialcareers:

https://news.efinancialcareers.com/uk-en/300035/bankers-london-mortgages/?utm_source=GLOBAL_ENG&utm_medium=SM_LI&utm_campaign=FANS

Conclusion

In normal conditions, an interest rate hike makes the value of the currency going up as well as the interest rate yields. The Brexit shadow appeared after the rate hike and this is why the British Pound and the bond yields plunged. I haven´t focused on the UK short-term interest rate futures, known as short sterling futures,  but they rose significantly showing the disappointment with the decision. I can understand that the Bank of England did it as a temporary measure to try to fight with the high inflation and the high level of personal debt. The future path of the rate hikes in the UK depends on the Brexit negotiations, and I don’t see any significant progress on them.  The market is pricing all of these facts. I like to follow the interest rate markets because you can see what´s going on without reading the news. As always, I hope you like this post.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

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