BoE’s interest rate decision in the epicenter

The USD tended to remain relatively unchanged against its counterparts yesterday as the markets mulled the release of the CPI rates for April as the year-on-year rates tended to slow down, while the month-on-month headline and core rates accelerated. On a macroeconomic level, the slight easing of the year-on-year rates was welcomed, yet the acceleration of the month-on-month rates served as a strong reminder that inflationary pressures are still simmering under the surface. The release tended to send out mixed signals which seemed to puzzle traders and tended to allow for the continuance of some ambiguity regarding the Fed’s intentions, which also forced US stock markets to show mixed results for the day. Also, we note the strengthening of JPY against the USD, after the release of April’s US CPI rates, but it also strengthened against the GBP and the EUR in a sign of broader strength, indicating the possibility of some safe-haven inflows given the enhancement of the market worries for a possible recession in the US economy and the US Government defaulting. The recent comment of US Treasury Secretary Yellen yesterday that a US default would produce economic, financial ‘catastrophe’ may have spooked investors yesterday. It’s characteristic that JPY did not weaken even as BoJ’s summary of opinions for the April meeting was released showing the bank’s intentions to keep its ultra-loose monetary policy settings in place. Also, on the monetary front, we highlight BoE’s interest rate decision today, as the bank is expected to hike rates by 25 basis points and the market seems to have almost fully priced in such a scenario, while GBP OIS also implies that the market expects the bank to proceed with another rate hike in its June meeting. Should the bank actually deliver the expected rate hike and maintain a rather hawkish tone in its accompanying statement implying more rate hikes to come we may see the pound gaining, anything less could weaken the sterling.

USD/JPY dropped yesterday after failing to clearly break the 135.15 (R1) resistance line. We tend to maintain our bias for a sideways motion of the pair, which may be supported by the fact that the price action in its drop has hit the lower Bollinger band forcing the pair to stabilize somewhat. On the other hand, though we note that the RSI indicator below our 4-hour chart remains close to the reading of 30, which may imply some bearish tendencies for the pair. For a bearish outlook, we would require the pair to break below the 132.85 (S1) line and aim for the 130.50 (S2) level. Should a buying interest be expressed by the market for the pair, we may see USD/JPY rising breaking the 135.15 (R1) line and aim for the 137.55 (R2) level.

GBP/USD remained in a rather tight rangebound motion just below the 1.2660 (R1) resistance line after an unsuccessful attempt to break it. We tend to maintain a bias for the pair’s sideways motion to continue and it’s characteristic that the RSI indicator below our 4-hour chart remains near the reading of 50 implying a rather indecisive market. Also note the convergence of the Bollinger bands which may reflect the lower volatility present in cable’s price action which in turn may allow for the sideways motion to continue. Yet the main factor behind a possible tack in GBP/USD’s direction today may be BoE’s interest rate decision. Should the bears take over, we may see cable breaking the 1.2465 (S1) line in search of lower grounds. Should the bulls dominate we may see GBP/USD breaking the 1.2660 (R1) line and aim for the 1.2865 (R2) level.

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During today’s European session, besides BoE’s interest rate decision, we would like to note also the Czech Republic’s CPI rates for April and on the monetary front please note that ECB Board member Schnabel speaks. In the American session, we note from the US the release of the weekly initial jobless claims figure and the PPI rates for April, while Fed Board Governor Waller and ECB’s De Guindos are scheduled to speak. During tomorrow’s Asian session, we get New Zealand’s manufacturing PMI figure for April.