FX Talking Points:
GBP/USD remains under pressure despite the lackluster developments coming out of the U.S. economy, and the pair remains at risk of staging a larger pullback over the near-term as it preserves the series of lower highs & lows from earlier this week.
The 1.5% reading for the core PCE, the Federal Reserve’s preferred gauge for inflation, paired with the minor uptick in the ISM Manufacturing survey adds to the mixed data prints coming out of the U.S. economy, with the Atlanta Fed GDPNow estimate now projecting the growth rate to expand an annualized 2.6% during the first three-months of 2018. In turn, a growing number of Fed officials may strike a less-hawkish tone as ‘a few other participants pointed to the record of inflation consistently running below the Committee's 2 percent objective over recent years and expressed the concern that longer-run inflation expectations may have slipped below levels consistent with that objective.’
With that said, the fresh forecasts coming out of the central bank may continue to show a neutral Fed Funds rate around 2.75% to 3.00%, and the Federal Open Market Committee (FOMC) may run the risk of adopting a slower approach in normalizing monetary policy as inflation continues to run below the 2% target.
In contrast, the Bank of England (BoE) may adopt a more hawkish outlook over the coming months as ‘the Committee judges that, were the economy to evolve broadly in line with the February Inflation Report projections, monetary policy would need to be tightened somewhat earlier and by a somewhat greater extent over the forecast period than anticipated at the time of the November Report.’ As a result, fresh remarks from Governor Mark Carney may curb the recent decline in the British Pound if the central bank head shows a greater willingness to implement higher borrowing-costs sooner rather than later, and the broader shift in GBP/USD may continue to unfold in 2018 as the BoE continues to alter the outlook for monetary policy.
GBP/USD Daily Chart
- Downside targets remain on the radar for GBP/USD following the failed attempt to test the 1.4100 (100% expansion) handle, with the pair at risk of extending the recent series of lower highs & lows as both price and the Relative Strength Index (RSI) snap the bullish formations carried over from late last year.
- A break/close below 1.3690 (61.8% expansion) to 1.3700 (38.2% expansion) raises the risk for a move back towards 1.3560 (50% expansion), with the next downside region of interest coming in around 1.3440 (38.2% expansion) to 1.3460 (50% retracement).
USD/JPY appears to be stuck in a narrow range even as the Bank of Japan (BoJ) pledges to further expand its balance sheet in March, and an uptick in the both the headline and core Consumer Price Index (CPI) for Tokyo may keep the Japanese Yen afloat as it discourages bets for additional monetary support.
Recent comments from BoJ officials suggest the central bank remains in no rush to move away from its easing-cycle as board memberGoushi Kataoka argues that ‘there is still a long way to go before considering a change in monetary policy stance.’ However, with the Federal Open Market Committee (FOMC) widely expected to deliver a 25bp rate-hike later this month, Governor Haruhiko Kuroda and Co. may find it increasingly difficult to further pursue its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control as the central bank gets closer to achieving the 2% target for inflation.
As a result, more of the same from the BoJ is likely to have a limited impact on USD/JPY, but the near-term rebound may start to unravel over the coming days as a bear-flag formation appears to be taking shape.
USD/JPY Daily Chart
- Another bear-flag appears to be taking shape as the rebound from the February-low (105.55) fails to spur a test of the 108.30 (61.8% retracement) to 108.40 (100% expansion) region.
- Keep in mind, the broader outlook for USD/JPY remains tilted to the downside as the Relative Strength Index (RSI) continues to track the bearish formations carried over from the previous year.
- Waiting for a close below 106.70 (38.2% retracement) to spur a move back towards the 105.40 (50% retracement) hurdle, with the next downside region of interest coming in around 104.10 (78.6% retracement) to 104.20 (61.8% retracement).
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--- Written by David Song, Currency Analyst
To contact David, e-mail . Follow me on Twitter at @DavidJSong.
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