BoE and ECB Interest Rate Decisions: Markets on Alert

The USD retreated substantially across the board yesterday as the Fed remained on hold as was widely expected, yet sounded more dovish than what the market may have expected. Furthermore, the new dot plot showed that Fed policymakers now tend to expect the interest rate to fall more in the coming year than in the September meeting. Overall the dovish Fed interest rate decision allowed for US stock markets to rise, as there was a more risk-on approach by the market favoring more riskier assets and the weakening of the USD allowed for Gold’s price to ascend.

Market interest now turns across the Atlantic as BoE is to release its interest rate decision. The bank is widely expected to remain on hold, keeping rates at 5.25% and GBP OIS imply a probability of 94.11% currently, for such a scenario to materialize. The market is expecting the bank to start easing its tight monetary policy from March onwards and proceed with a total of five rate cuts in the coming year. We expect a certain degree of hawkishness as the CPI rates, despite a substantial slowdown in October, are still high. Yet a possible cautiousness along with a recognition that the bank’s rates are in a restrictive territory, could reassure the markets that rate cuts are under way and could weaken the pound.

GBP/USD jumped breaking the 1.2600 (S1) resistance line now turned to support. Given that the downward motion has been interrupted and the RSI indicator has jumped above the reading of 50 implying a buying interest in the market sentiment, we switch our bearish outlook in favour of a bullish outlook for the time being, yet note that BoE’s interest rate decision may lead the pair to any direction. Should the bulls actually be in charge, we may see the pair breaking the 1.2735 (R1) resistance line and aim for the 1.2880 (R2) resistance nest. Should the bears take over, we may see cable diving below the 1.2600 (S1) support line and aim for the 1.2445 (S2) support level.

Across the Channel, we note the release of ECB’s interest rate decision and the bank is expected to remain on hold. Currently, EUR OIS imply a probability of 96% for such a scenario to materialize, yet also that the bank is to start cutting rates in early March and end the year with a total of six rate cuts. It should be noted that the HICP rate has slowed down considerably in November’s preliminary release, nearing the bank’s 2% target, strengthening the case for earlier rate cuts. Should the bank show signs that it intends to start cutting rates early next year, we may see the common currency losing some ground.

EUR/USD jumped breaking the 1.0835 (S1) resistance line now turned to support. We switch our past bias for a sideways motion in favour of a bullish outlook given also that the RSI indicator has surpassed the reading of 70, implying a strong bullish sentiment on behalf of the market. Yet the fact that the RSI indicator has broken the reading of 70 and given also that the price action is flirting with the upper Bollinger band, we may see the pair being ripe for a correction lower as it may have reached overbought levels. Should buyers maintain control over the pair, we may see EUR/USD breaking the 1.0965 (R1) resistance line and aim for the 1.1065 (R2) resistance level. On the other hand should a selling interest be expressed by the market, we may see EUR/USD breaking the 1.0835 (S1) support line and aim for the 1.0735 (S2) support level.

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Today in the European session we get Sweden’s CPI rates for November and then we note the release of SNB’s, Norgesbank’s, BoE’s and ECB’s interest rate decisions. In the American session, we note the release of the weekly initial jobless claims figure and November’s retail sales growth rate. During tomorrow’s Asian session, we get Australia’s and Japan’s preliminary PMI figures for December as well as China’s urban investment and industrial output growth rates for November.