British Pound Volatility Risk High as BoE Updates Rate Outlook

By DailyFx | Updated August 12, 2014 AAA

DailyFX.com -

Talking Points:

  • Dollar Weighs Cross Currents Against Domestic Data
  • British Pound Volatility Risk High as BoE Updates Rate Outlook
  • Euro: Investor Sentiment Collapses, Will Stalled Growth Complete the Picture?

Dollar Weighs Cross Currents Against Domestic Data

An attempt by the Dow Jones FXCM Dollar Index (ticker = USDollar) to break free of its two-week range and make progress at its four-month high proved feeble. This lackluster performance was not particularly surprising given the lack of tangible fundamental grip through the session. For scheduled event risk, an uptick in the NFIB Small Business Optimism survey (to near seven-year highs) and 13-year high from the JOLTS job openings report seem to offer up the headline-grabbing historical relevancy and relate to the market’s primary fundamental concerns. However, these measures are too far from the speculative epicenter to move the masses. For interest rate expectations, shorter duration Treasury yields slipped lower and Fed Funds futures moderated the forecasted pace of tightening. And, on the risk front, the S&P 500 leveled out after its rebound while the VIX volatility index held course just above 14.

The dollar is not as susceptible to mild changes in the fundamental web as it once was. It needs more obvious and forceful motivation – especially when it comes to gains that would necessitate serious changes in prevailing sentiment and interest rate trends. From the upcoming docket, the US event risk fills out with July retail sales, a 10-year Treasury note auction and two Fed speakers (Dudley and Rosengren). Yet, this round is still likely to fall short of critical mass. That said, the potential for heavier swings from the Euro and Pound – primary counterparts – can leverage a ground appetite or distaste for the greenback given the correct motivations.

British Pound Volatility Risk High as BoE Updates Rate Outlook

For volatility risk, the British Pound is the most exposed major through the upcoming session between the July labor statistics and the Bank of England’s (BoE) Quarterly Inflation Report. However, you wouldn’t know it looking at levels of implied (expected) volatility. While, the short-term (one-week) reading of projected volatility for GBPUSD may be at a two-month high at 5.52 percent, it is only barely edged above the July’s range above record lows. This lack of anticipation is appropriate against the backdrop of financial markets that have seen activity levels steadily deteriorate with time; but it also leaves the market unprepared for potentially heavy trading…and perhaps even trend development. The upcoming BoE report is perhaps the most capable fundamental update for shaping what matters most to pound traders: the timing and aggression of the central bank’s return to rate hikes. Timing is not made explicit so ‘concerns’ and forecasts for inflation and growth will act as the measure of speculation. A recent Reuters poll of economists showed a 45 percent probability of a 25bp hike before year’s end.

Euro: Investor Sentiment Collapses, Will Stalled Growth Complete the Picture?

Investor confidence in the Euro-area caved this month according to the ZEW’s survey. The Eurozone’s August reading was more than halved with a reading of 23.7 (previous 48.1) that exaggerates a turn in confidence that had already began to develop around the start of the year. Though it was not an indicator that triggered an immediate and pervasive euro selling, its implications run deep. Investor confidence has been a key factor in the currency’s appreciation from mid-2012 (when the OMT program was introduced). Is the quest for yield exhausted in the Euro? If so, the repatriation can swamp he currency. Ahead, we will test another of the Euro’s major concerns – growth – with Greek 2Q GDP.

Yen Crosses Unscathed by News of Japan’s Worst Economic Slump Since Great Recession

Japan’s economy contracted in the year through the second quarter a painful 6.8 percent. On the face of it, this seems a catastrophic outcome. However, fears temper when we realize the consensus was for a 7.0 percent slump. We evaluate the indicator even more rationally when we realize that this data series experiences wide fluctuations. The 5.2 percent drop in consumer spending for the quarter was the biggest on records going back 20 years. This is a severe impact after the April tax hike. But it is still unlikely to motivate the BoJ to upgrade its QE program.

Australian Dollar Traders Fear Another Wave of Volatility Should Chinese Data Misfire

Interest rate hopes for the Australian dollar was distant and fragile. With the moderate of local data and the RBA’s devotion to an accommodative default stance, hope for this carry currency is quickly fading. However, the real make-or-break for the currency rests not with the Aussie economy’s measures, but rather its largest trade partner – China. This morning, we’ve already seen lending figures for July collapsed as the PBoC tries to rein in a credit bubble. Should Chinese retail sales and production slide as well, Australia’s outlook is going to take a hit.

Emerging Market Benchmarks Tick Higher, Russian Ruble Returns to the Bears

The Emerging Markets’ modestly outperformed the favored benchmark for investor sentiment this past session. Where global equity indexes were modestly underwater, the MSCI Emerging Market ETF closed up 0.1 percent on lukewarm volume while Bloomberg’s EM sovereign bond index leveled off. In the FX ranks, there were gains ground out against the US Dollar by the Korean Won (0.4 percent), Mexican Peso (0.3) and Indian Rupee (0.2). The top story, however, remains the Russian Ruble as blocked aid shipments to Ukraine kept the media focused.

Gold’s Short-Term Breakout Finds No Traction

As expected, the rapidly deteriorating trading range for gold forced a breakout this past session. Yet, also as expected, that break would lead nowhere. Forging such a technical move without a unifying motivator means there is little to no conviction that was ready to follow through on the development. We may have something more to work with in the upcoming session however. If the BoE alters its policy bearings, the Greek GDP data furthers the argument of ECB stimulus or US Fed speakers weigh in on rates; we hit a more tangible gold interest.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

00:30

AUD

Westpac Consumer Confidence (AUG)

1.9%

On uptrend since April 2014

01:30

AUD

Wage Cost Index (QoQ) (2Q)

0.7%

0.7%

Higher than expected wage inflation might hint at better consumer sentiment, driving hawkish policy expectations

01:30

AUD

Wage Cost Index (YoY) (2Q)

2.6%

2.6%

05:30

CNY

Retail Sales (YoY) (JUL)

12.5%

12.4%

Chinese retail sales and industrial production will be in focus as better than expected data will strengthen convictions of an improving economy

05:30

CNY

Industrial Production (YoY) (JUL)

9.1%

9.2%

05:30

CNY

Fixed Assets Ex Rural YTD (YoY) (JUL)

17.4%

17.3%

06:00

EUR

German Consumer Price Index (YoY) (JUL F)

0.8%

0.8%

Germany is the Eurozone’s largest economy and better than expected inflation data might pause further easing steps

06:00

EUR

German CPI - EU Harmonised (YoY) (JUL F)

0.8%

0.8%

06:00

EUR

German Wholesale Price Index (YoY) (JUL F)

-0.8%

08:30

GBP

Claimant Count Rate (JUL)

3.0%

3.1%

The Employment report will be in focus as the UK is expected to report its lowest unemployment rate since Dec 2008. The BoE has been under pressure recently to hike rates, and better than expected figures are like to increase pressure.

08:30

GBP

Jobless Claims Change (JUL)

-30.0K

-36.3K

08:30

GBP

Average Weekly Earnings (3M/YoY) (JUN)

-0.1%

0.3%

08:30

GBP

ILO Unemployment Rate (3M) (JUN)

6.4%

6.5%

08:30

EUR

Italian General Government Debt (JUN)

2166.3B

Has increased consistently since Jan

09:00

EUR

Euro-Zone Industrial Prod. w.d.a. (YoY) (JUN)

0.2%

0.5%

Better than expected industrial prod. also may reduce expectations of further stimulus from the ECB

09:00

EUR

Euro-Zone Industrial Prod. s.a. (MoM) (JUN)

0.4%

-1.1%

09:30

CHF

Credit Suisse ZEW Survey Expectations

0.10

On downtrend since Jan 2014

11:00

USD

MBA Mortgage Applications (AUG 8)

1.6%

Signals demand for housing

12:30

USD

Advance Retail Sales (JUL)

0.2%

0.2%

Retail sales indicate consumer sentiment, and better than expected data might stir rate hike talks

12:30

USD

Retail Sales Ex Auto and Gas (JUL)

0.4%

0.4%

13:00

CAD

Teranet/National Bank HPI (YoY) (JUL)

4.4%

YoY change has been around the 4.5% mark during 2014

13:00

CAD

Teranet/National Bank HPI (MoM) (JUL)

0.9%

14:00

USD

Business Inventories (JUN)

0.4%

0.5%

Rose 5.6% in May 2014 from May 2013

14:30

USD

DOE U.S. Crude Oil Inventories (AUG 8)

-1756K

Higher reserves drive down crude prices

22:30

NZD

Business NZ Perf. of Manufacturing Index (JUL)

53.30

Higher than expected inflation unlikely to cause speculations of a rate hike from the RBNZ after overall reports weak

22:45

NZD

Retail Sales Ex Inflation (QoQ) (2Q)

1.0%

0.7%

23:01

GBP

RICS House Price Balance (JUL)

51.0%

53.0%

BoE recently introduced price control measures

23:50

JPY

Machine Orders (YoY) (JUN)

3.0%

-14.3%

Better than expected orders might signal a pickup in demand, reducing expectations of more stimulus from BoJ

23:50

JPY

Machine Orders (MoM) (JUN)

15.3%

-19.5%

23:50

JPY

Japan Buying Foreign Bonds (Yen) (AUG 8)

¥897.4B

A sharp increase in Japanese bond purchases is often seen during times of global crisis. Any new tensions between Israel and Gaza as well as Ukraine and Russia might spurt an increase in foreigners buying bonds in Japan

23:50

JPY

Foreign Buying Japan Stocks (Yen) (AUG 8)

¥94.9B

23:50

JPY

Foreign Buying Japan Bonds (Yen) (AUG 8)

¥367.5B

23:50

JPY

Japan Buying Foreign Stocks (Yen) (AUG 8)

¥246.2B

GMT

Currency

Upcoming Events & Speeches

09:30

GBP

Bank of England Inflation Report

13:05

USD

Fed's Dudley Speaks on Wholesale Funding in New York

13:20

USD

Fed's Rosengren Speaks on Wholesale Funding in New York

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.3250

2.3000

11.8750

7.8075

1.3250

Resist 1

7.3285

5.8475

6.3145

Spot

13.2247

2.1418

10.7169

7.7500

1.2479

Spot

6.8969

5.5678

6.2834

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.7750

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

6.0800

5.2715

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3468

1.6986

103.53

0.9144

1.0977

0.9377

0.8580

138.62

1304.30

Res 2

1.3449

1.6960

103.35

0.9130

1.0960

0.9359

0.8562

138.38

1299.11

Res 1

1.3429

1.6935

103.18

0.9116

1.0944

0.9342

0.8544

138.15

1293.92

Spot

1.3391

1.6884

102.82

0.9088

1.0911

0.9306

0.8507

137.68

1283.53

Supp 1

1.3353

1.6833

102.46

0.9060

1.0878

0.9270

0.8470

137.21

1273.14

Supp 2

1.3333

1.6808

102.29

0.9046

1.0862

0.9253

0.8452

136.98

1267.95

Supp 3

1.3314

1.6782

102.11

0.9032

1.0845

0.9235

0.8434

136.74

1262.76

v

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