19 June 2023

Weekly Outlook - BOE to Hike As Inflation Remains Elevated


As expected, the ECB hiked while the Fed and BOJ held interest rates. Now markets have a week to digest the latest central bank moves, with the BOE the next to raising rates.

3 Top Stories for the Week Ahead

  • UK CPI and BOE Rate Decision on Wednesday and Thursday

  • Powell's Congressional Testimony on Wednesday and Thursday

  • Japan Inflation on Thursday night

BOE To Hike Despite Expected CPI Drop

The UK ONS will report May inflation figures just a day before the BOE meets to decide on monetary policy. UK inflation on the headline is expected to come down to 8.4% from 8.7%, well above target and likely not enough to shake the consensus around the expected 25bps hike from the BOE. The focus of the decision is likely on the vote count to see if any change could signal a weakening of the hawkish stance. An expected full percentage point drop in the core inflation rate to 5.8% from 6.8% prior could shake up expectations for the outlook beyond the next meeting.

GBP/AUD prepares to exit the ascending trend ahead of the event, with a decrease in core or a change in votes (or both), supporting the thesis. Losing 1.85 could enact additional shorts towards 1.8200, potentially triggering a longer-term descent below 1.80. A hawkish CPI or BOE would inversely increase the chances of a break past 1.8750, potentially targeting the 1.90 threshold as the right shoulder of an H&S pattern.

Tradingview Chart: British Pound / Australian Dollar

JP in a Tight Spot Before Congress

Immediately after the Fed delivered the widely anticipated "skip", projections from members showed 50bps more tightening this year. The bond markets moved to price in a higher chance of a recession in the aftermath of the FOMC. Fed Chair Jerome Powell could be pressed on the central bank's outlook and policy, and it might be an opportunity for some "clarification" of the Fed's position in light of the market reaction.

The price of gold gave substance to the lack of clarity despite falling post-FOMC, as it swung from a 3-month low of $1970 to $1925 to end the week broadly unchanged. A low is in, however, and the RSI shows divergence, which suggests that if Powell persists on his presser narrative, gold could see a further uptick above $1985 and towards the $2k handle. Otherwise, bears could target the swing low at $1890.

Tradingview Chart: Gold Spot / U.S. Dollar

Japan Expects Lower Inflation, But Will It Get It?

With the USDJPY pushing above 140.00 and recently reaching 142.00, officials from the Japanese Government are looking for ways around slowing the currency's depreciation as the weaker yen partly caused the latest bout of inflation. A stronger yen at the beginning of the year contributed to bringing down inflation, but the recent weakening could see inflation return, implying that a beat on expectations for CPI could bring the BOJ's focus back to the exchange rate.

If Japan's inflation exceeds expectations by anything but a marginal figure, USD/JPY could confirm the recent momentum exhaustion and slide towards 138.42 if 140.93 collapses. Further declines could see the pair hit 137.89, but unlikely to see an attempt much lower. Conversely, as the measured move implies, the triangle breakout target lies at 142.58, with the next resistance at round 143.00 and 144.00.

Tradingview Chart: U.S. Dollar / Japanese Yen

Top Stories in Review

  • The Fed held rates steady, pointing to two more rate hikes this year, but Fed Chair Jerome Powell insisted it wasn't a "skip". The dollar weakened as the yield curve inverted more, and traders worried about increased risk of recession.

  • The ECB added to global tightening by raising rates as expected, with the Euro gaining through the week.

  • New Zealand fell technically into a recession, but the currency strengthened as investors didn't believe that the lack of economic growth would dissuade the RBNZ from focusing on keeping prices down.

  • Crude prices remained under pressure on demand concerns as the US reports another surprise inventory build.

  • China PBOC cut the RRR and MLF to shore up the economy, weakening the yuan.

  • Japan's trade deficit came in larger than expected, contributing to the yen hitting a 7-month low.

Major Calendar Events 19-23 June (GMT)

Source: Investing.com

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