The British pound was the main loser among the major currencies yesterday and today in Asia, and this is because the UK services PMI tumbled to a 15-month low, increasing fears over a recession in the UK economy soon, and prompting market participants to push back their bets with regards to the BoE’s future course of action.
The Kiwi was the leading gainer after the RBNZ hiked by 50bps and steepened its rate-path projections. As for today, the main item on the economic agenda may be the minutes from the latest FOMC decision.
PMIs Deepen Slowdown Worries, GBP Falls After Services Index Slumps
The US dollar traded lower against all but two of the other major currencies on Tuesday and during the Asian session Wednesday. It gained only versus GBP and CAD, while it lost the most ground versus NZD, JPY, and AUD.
At first glance, the strengthening of the Kiwi and the Aussie points to risk-on trading activity, but the fact that the yen was the second gainer in line points otherwise.
Thus, to better understand the broader market sentiment, we prefer to turn our gaze to the equity world. Most major EU and US indices slid there, but appetite improved again during the Asian session today.
The slide in EU and US equities may be owed to the miss in most of the preliminary PMI indices for May from the Eurozone, the UK, and the US. The biggest disappointment was the tumble in the UK services PMI to a 15-month low. Specifically, that index fell to 51.8 from 58.9, raising fears that a recession may be looming sooner than the BoE’s projections suggest.
Remember that the BoE warned over a recession next year at its latest gathering, prompting market participants to push back their bets about future rate increases. Those bets were pushed further back yesterday, and that’s why we saw the pound falling against all the other major currencies.
Yes, with inflation in the UK at 9%, we do see the case for the BoE to keep raising interest rates, but with recession fears intensifying, we believe that the pace will be much slower than expected a couple of months ago.
EUR/GBP – Technical Outlook
EUR/GBP spiked up yesterday, following the disappointment in the UK services PMI, crossing above the 0.8530 barrier, marked by the highs of May 13 and 16, and hitting resistance at 0.8585. Overall, the pair remains above the tentative upside support line drawn from the low of Apr. 14, which, combined with yesterday’s rally, makes us believe that another round of buying could be possible, despite the setback after hitting 0.8585.
The setback may continue for a while, but the bulls could still tack charge from above the aforementioned upside line, perhaps from near one of the 0.8530 or 0.8505 barriers. A potential rebound could target again the 0.8585 zone, the break of which could extend the advance towards the peak of May 12, at around 0.8620. Another break above 0.8620 could encourage the bulls to climb towards the 0.8657 zone, which provided strong resistance between Apr. 16 and 30, 2021.
We will start examining the bearish case upon a dip below 0.8435, marked by the low of May 23. Such a move could confirm the break below the aforementioned upside line and open the path towards the low of May 17, at 0.8393, or the low of May 2, at around 0.8370.
If neither barrier can halt the fall, then a lower break could carry larger bearish implications, perhaps setting the stage for declines towards the low of Apr. 21, at 0.8310.
RBNZ Steepens Its Rate Path; Attention Turns To Fed Minutes
The leading gainer was the New Zealand dollar, but not due to improving market sentiment. The Kiwi surged overnight after the RBNZ raised interest rates by 50bps to 2.0% as was broadly anticipated but also revised up its rate-path projections.
The bank now sees its OCR hitting 3.95% by September 2023. Following the more cautious language at the last gathering, where officials judged that the rate path indicated in February was still appropriate, this is a more hawkish stance in our view, which, combined with the latest concerns over the performance of the US economy, could help NZD/USD drift a bit higher.
As for later today, the spotlight is likely to fall on the minutes from the latest FOMC meeting. At that meeting, officials hiked by 50bps but dismissed the case of a triple hike in June. However, since then, market participants came in peace with the idea of a couple of more double hikes, especially at a time when other major central banks may not proceed that aggressively, and thus, they decided to buy a few more dollars.
In any case, the dollar pulled back again the last few days due to economic slowdown fears. With Fed Chair Powell noting in aftermath speeches that they will not hesitate to move more aggressively if inflation does not slow down as expected, it will be interesting to dig into the minutes to find out how many of his colleagues share that same view. If most of them are willing to do more if needed, then the greenback may slow down its latest correction lower.
NZD/USD – Technical Outlook
NZD/USD spiked higher after the RBNZ revised up its rate-path projections, after it hit support at the crossroads of the 0.6420 barrier, and the upside support line drawn from the low of May 16. The spike took the rate above the 0.6490 zone, confirming a forthcoming higher high on the 4-hour chart, which combined with the fact that the pair is trading above the prior downside resistance line taken from the high of Apr. 5, paints a positive near-term picture.
In our view, the break above 0.6490 may have opened the way towards the peak of May 5, at around 0.6570, the break of which could extend the advance towards the high of Apr. 26, at around 0.6645. If the bulls are not willing to stop there, then we may see them pushing towards the 0.6715 territory, marked by the inside swing lows of April 18th and 19th.
On the downside, we would like to see a clear and decisive dip below 0.6295 before we start examining whether the bears are back in full control. This could confirm the rate’s return back below both the aforementioned diagonal lines and could aim for the 0.6225 zone, which provided strong support between May 12th and 15th.
Another break, below 0.6225 could extend the fall towards the 0.6150 area, marked by the low of May 27, 2020, or even towards the low of May 24, at around 0.6080.