The week started with a good risk appetite. The US dollar softened across the board. The US and European equity futures were bid in Asia, as expectations for a Federal Reserve (Fed) rate hike have been kicked further down the road. The September option appears to be pushed aside by the market, although the Fed did not rule out the possibility of a hike at the September meeting.
The FTSE opened in the green. However, the UK’s retailers failed to jump on the back of the bull as WM Morrison Supermarkets PLC (LON:MRW) (-3.50%) said it will lower the price of 1,045 products by an average 18%. Tesco (LON:TSCO) (-1.35%), J Sainsbury PLC (LON:SBRY) (-0.45%) joined the sell-off.
In Japan, the yen retreated after having hit 101.82 against the US dollar following the Bank of Japan’s (BoJ) decision to maintain the interest rates and the size of its bond purchases program (QQE) unchanged. The BoJ announced the decision to speed up its ETF purchases however, from 3.3 trillion to 6 trillion yen.
The markets are now expecting the government to announce a massive fiscal stimulus package. The expectation is a 28 trillion yen worth of spending, including 13 trillion yen worth of low-rate loans.
Hence, the margin for an upside surprise is perhaps limited. Any disappointment on the fiscal leg could trigger a fresh wave of sell-off in USD/JPY; the 100 level is still on the table.
Tech alert on hourly chart: GBP/USD
The broad based depreciation in the US dollar sent the GBP/USD above 1.3218, the major 38.2% retracement on July 15 – July 26 decline. The hourly trend and momentum indicators are positive with higher trading volumes compared to the last two weeks.
The bullish momentum is at risk however as, the looming downside risks could rapidly dent the appetite in the sterling and hand the market back in bears’ hands before the Bank of England’s (BoE) policy decision and the Quarterly Inflation Report (QIR) due on Thursday.
The market expects the BoE to lower the bank rate by 25 basis points and to proceed with a significant downside revision on the economic forecasts following Britain’s decision to leave the European Union. Due to expire this week, puts are dominant between 1.32 – 1.30, while calls come into play above 1.33.
On the daily chart, the pair remains comfortably in the mid-term negative trend. A critical technical resistance is eyed at a distant 1.3627, the major 38.2% retracement on post-Brexit sell-off. We could consider a sustainable recovery, and not a USD-based correction, only if this level is surpassed.