GBP/USD Key Levels Into BOE, Silver Considers Its Next Breakout

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Summary:

The big question for today is if the BOE will satisfy bearish market positioning with enough dovish talk to prevent shorts from covering, and inadvertently sending GBP/USD higher.

Today's Bank of England (BOE) meeting will garner a lot of attention, to see if they signal the June cut markets so desperately want to hear. I'm not fully convinced they will. But that may not prevent the British pound from weakening as we approach the meeting in anticipation of such an announcement.

The big question for today is if the BOE will satisfy bearish market positioning with enough dovish talk to prevent shorts from covering, and inadvertently sending GBP/USD higher. Asset managers remained near the record level of net-short exposure to GBP futures, set two weeks ago according to the COT report. And large speculators were net-short for a second consecutive week, and at their most bearish level since January 2023.

Markets are pricing in 41bp of easing this year, which roughly equates to an 82% chance of two 25bp cuts by December. Yet ING have four cuts pencilled in, with easing to begin in August or potentially June.

GBP/USD Key Levels Into BOE, Silver Considers Its Next Breakout_1

Even if the BOE do not effectively confirm an incoming cut to arrive as soon as June or July, we may be able to indicate pressure is building to move if we see a change in MPC votes. Last month only one member of voted to cut, eight to hold and none to hike. Part of my finds it difficult to believe we'll see a material difference to chance policy today, given their last meeting was the first since late 2021 to not have votes for a hike. But if pressure is building to cut, it should at least see votes to cut be 2 or greater (which would mean hold would become 7 or less).

Ultimately, traders will want a clear script from the BOE to justify continued weakness of the British pound, as failure to do so could send GBP pairs higher.

Economic events (times in AEST)

11:00 – BOE interest rate decision, MPC votes, minutes

12:15 – ECB De Guindos speaks12:30 – US jobless claims

13:15 – BOE Bailey speaks

GBP/USD technical analysis:

The 1-hour chart shows a downtrend on GBP/USD, although it is within a period of consolidation after finding support at last week's low. Whatever happens, I suspect we'll at least see an initial move lower – with a clear dovish BOE likely required to send it beneath last week's low. Notice that the weekly S1 pivot sits between the April VPOC (volume point of control) and last week's ow, making it a likely support zone.

But if the BOE fail to deliver the dovish message traders seek, then GBP/USD could rally on the back of short covering. Note that the upper 1-day implied volatility band suits near the weekly pivot point and 200-day average, making it a likely area of resistance.

GBP/USD Key Levels Into BOE, Silver Considers Its Next Breakout_2

Silver technical analysis:

Regular readers will know that I have been awaiting for gold prices to pop higher over the past week. Whilst there's no cigar, the bias remains bullish until bearish momentum returns to the daily timeframe. However, silver may have the more compelling setup.

Silver prices formed a strong rally in March through the first half of April, before a 3-wave retracement found at the May high near the $26 handle. Momentum has pushed higher ahead of a small consolidation, with prices now holding above $27. Given this consolidation has formed around the VPOC from the 3-wave decline, it appears comfortable in its current consolidation. But if prices can break above last week's high ~27.50 then I suspect bulls will want to gun for the $28 handle at a minimum, or the high-volume node around $28.25.

GBP/USD Key Levels Into BOE, Silver Considers Its Next Breakout_3

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Kevin Du

Forex

Central Bank

Economic

The country's forex reserves decreased to $1.14 trillion in April, largely on the back of drop in the holdings of foreign securities to $978 billion from $995 billion the previous month, according to a finance ministry report Thursday. The securities holdings had been expected to fall due to a decline in the market value of overseas assets including Treasuries as yields rose.

The data come with evidence already pointing to two recent interventions in the currency market by Japan to prop up the yen. The first move came at the very end of April after the currency hit 160 against the dollar for the first time since 1990. The suspected intervention was likely not settled in the reserves data until the beginning of May.

“If there was intervention on April 29, the settlement day would be May 1, so it's possible the end of April foreign reserves don't reflect the intervention,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.

A MOF official declined to comment about individual transactions made in April.

While Japanese officials have steered clear of confirming if they conducted intervention, a Bloomberg analysis of the central bank's current account suggests the nation probably entered the market twice last week, buying roughly ¥6.2 trillion ($40 billion) of yen in the first move and ¥3.2 trillion in the second, based on updated data and money broker estimates.

Japanese officials have been sticking to their strategy of concealing whether they have taken action, forcing investors to make educated guesses about the market moves. Finance Minister Shunichi Suzuki declined to confirm if the interventions took place when asked about the topic in parliament on Wednesday.

Japan's currency chief Masato Kanda said earlier Thursday that it wasn't true government officials spoke about market intervention, following a TV Tokyo report citing an unidentified official confirming that the government stepped into the market last week.

“We are not going to comment on whether the government intervened,” Kanda said. Japan is ready to take action at any time if it is needed, he added.

The data from the BOJ's current accounts has become more useful for estimating the size of intervention than analyzing the reserves, according to Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co.

“Foreign exchange reserves have received less attention recently because they are affected by all kinds of factors, including fluctuations in non-dollar currency rates and changes in the market value of securities holdings.”

Source: Bloomberg

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Remarks of Officials

Boston Fed President and CEO Susan M. Collins delivered a speech on May 8, with the main content as follows.

There is a lack of disinflationary progress made in 2024. In the short term, inflation in both core goods and core services (excluding housing) has picked up. However, I'm not surprised that there are some bumps in the road to disinflation. I remain optimistic that inflation can come back to 2 percent in a reasonable amount of time, with a labor market that remains healthy.

While some of the impact is still not yet reflected in prices, the core goods sector is unlikely to contribute more to disinflation. While new tenant rents have generally returned to pre-pandemic levels, existing tenant rents remain putting upward pressure on housing inflation. In addition, there is still a lot of uncertainty about the increase in labor supply and productivity.

Therefore, lower demand growth will be needed to make progress on inflation, particularly to promote a further slowdown in core non-housing services inflation.

Labor costs remain below pre-pandemic levels. Firms can afford to absorb faster wage growth without putting pressure on inflation. In addition, there is scope for wages to catch up to past prices and productivity increases over time without generating additional inflationary pressures.

Demand is expected to slow eventually to better align with the supply side, but the timing and magnitude of the slowdown remain uncertain.

Cutting interest rates too soon or holding too long is risky, which will lead to unnecessary economic damage. The current policy stance, which I view as being moderately restrictive, is appropriate for balancing the current two-sided risks. Also, I will focus on several areas particularly. First, short- and longer-term inflation expectations remain well anchored. Second, wages continue to evolve in a way that is consistent with price stability. Third, labor markets are moderating in an orderly way that better aligns labor supply and demand.

Collins' Speech

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Alex

Commodity

Stocks

Over the past 30 days, the price of the closely watched West Texas Intermediate crude oil futures has declined by 8.5% with the price falling below its 100-day moving average. Over that same period, the largest pure-play oil ETF, the $1.4 billion United States Oil Fund LP (USO) has gained about 1%.

Oil ETFs Notch Gains as Crude Price Slips_1

Still, caution may be creeping in: USO experienced $20.8 million worth of net outflows last month, including $370 million moving out on April 23.

Oil ETFs' Resiliency May Be Short-Lived

A little more than a month ago surging demand for oil was driving the price of the commodity higher. ETFs offering direct and indirect exposure to the category have been among the strongest performers of the year.

USO is up 19% from the start of the year and the Energy Select SPDR ETF (XLE), which tracks an index of energy companies, is up 16%. That tops the SPDR S&P 500 Trust ETF (SPY), which tracks the broad S&P 500 index and has gained 7.7% this year.

Still, the rest of the year looks dimmer for oil and oil-related investments, according to Tom Graff, chief investment officer at Facet Wealth in Phoenix, Maryland.

“As we look at the possible scenarios over the next six-to-12 months, we see a lot more where oil is lower than higher,” he said. “A lot of people are focusing on supply issues, particularly surrounding wars in Ukraine and the Middle East, but with Chinese and European growth outlooks murky, demand may be the more important factor.”

Another headwind for oil prices is the increasing strength of the U.S. dollar, which is expected to keep surging until the Federal Reserves starts cutting interest rates.

“As it relates to oil ETFs, differentiating the commodity prices from the underlying holdings in various ETFs is key,” said Stephen Kolano, chief investment officer at Integrated Partners in Waltham, Mass.

“Many of the oil ETFs are holding oil producers” from across the business spectrum, he added. “Key there is that the price of oil is still up almost 10% from the beginning of the year.”

Nick Codola, senior portfolio manager at Orion Advisor Solutions in Omaha, Neb., also emphasized the current disparity between the cost of production and the price of oil as a reason oil-sector ETFs are holding up under the cloud of falling oil prices.

“Their cost of production is somewhere around $40 a barrel, so anything above that they are making money, and moves in the spot price don’t affect them as much because they often hedge their exposure and lock-in longer term contracts with periodic resets,” he said.

What Codola is describing as a “week or two where oil is down” is less a threat to oil-sector ETFs than would be a sustained downtrend over several months.

“That would hurt them, and you’d start seeing significant falling revenues and margins as those old contracts expire or reprice themselves,” he added.

Source: etf.com

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Devin

Central Bank

Economic

The Bank of England is likely to take another step towards its first interest rate cut in four years on Thursday as inflation falls, but will probably be cautious about signalling that a move is imminent.

The central bank is widely expected to keep its benchmark Bank Rate on hold for a sixth meeting in a row at 5.25% - the highest since 2008 - after its May monetary policy discussions.

The big question for investors is whether the BoE suggests that a cut could come in June - when the European Central Bank has already signalled it will reduce borrowing costs - or, like the U.S. Federal Reserve, holds out for longer.

"We view further caution as reasonable," said Paula Bejarano Carbo, a National Institute of Economic and Social Research economist, citing still-strong pay increases in Britain's tight jobs market and uncertainty over conflict in the Middle East.

Financial markets are fully pricing a first quarter-point BoE rate cut only in August and another in November or December taking Bank Rate to 4.75%, followed by more cuts in 2025.

But investors have bet increasingly in recent days on the possibility of an earlier move. Rate futures markets on Wednesday put a nearly 50-50 chance on a cut in June.

Matthew Swannell, UK economist at BNP Paribas, said the BoE had discovered over the past couple of years that changes in rates were slower to impact inflation than in the past, and that it probably wanted to move relatively quickly to cut them now as headline inflation is likely to dip below its 2% target soon.

But the BoE would probably be reluctant to send an explicit signal about the timing of a first cut on Thursday, he said.

"We don't expect to open the minutes and see them giving ECB-style guidance," Swannell said.

He predicts Bank Rate will be lowered three times to 4.5% by the end of 2024, starting in June.

An early move would be welcome for Prime Minister Rishi Sunak, who has told voters that the economy is turning a corner but is struggling to rein in the big opinion poll lead for the opposition Labour Party with an election expected this year.

Messages For Markets

If the BoE does signal an acceleration towards a rate cut, it could come in the vote tally on Thursday.

Members of the BoE's Monetary Policy Committee will probably vote 8-1 for a second time in a row to keep Bank Rate on hold, according to most economists polled by Reuters.

But some said Deputy Governor Dave Ramsden might join Swati Dhingra who has so far cast the solitary vote for a cut.

Ramsden said last month inflation might prove weaker than the BoE's forecasts although Chief Economist Huw Pill warned that rate cuts remained some way off.

Wage growth and services price inflation of around 6% remain higher than in the United States or euro zone, even though British economic growth is more sluggish.

There might also be a message in the BoE's new inflation projection: if it lowers the two- and three-year forecasts significantly it would be interpreted by investors as a signal that they are pricing in too few interest rate cuts.

The BoE's inflation forecasts are based on market pricing in the run-up to its MPC meetings.

Bailey and other officials will hold a press conference at 1130 GMT, half an hour after the rate decision is announced along with minutes of May's meeting and its latest forecasts.

Source: Reuters

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Risk Warnings and Disclaimers

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FastBull Featured

Daily News

[Quick Facts]

1. Hamas says it will not compromise further to win Gaza ceasefire.

2. Russia launches the biggest airstrike in weeks.

3. NY Fed's Perli offers guideposts to measure market liquidity levels.

4. Fed's Collins says reaching the 2% inflation goal may take longer.

5. ECB's Holzmann says the ECB cannot ignore the Fed when setting policy.

6. ECB's Wunsch warns of risks to inflation outlook and expects two cuts.

[News Details]

Hamas says it will not compromise further to win Gaza ceasefire

Israel entered Gaza on Tuesday via the Rafah border crossing with Egypt. It cut off an important aid route which is the only exit to evacuate the wounded. Tank and air strikes continued on Wednesday against the southern Gaza city of Rafah, threatening to launch a major offensive.

Izzat El-Reshiq, a member of Hamas's political office in Qatar, said in a statement issued on Wednesday that Hamas would not compromise further within the ceasefire proposal it accepted on Monday, which included the release of a number of Israeli hostages in Gaza as well as Palestinian women and children held in Israel. Reshiq said Israel was not serious about reaching an agreement and was using the talks as a cover for invading Rafah and seizing the border crossing.

Israel did not immediately respond to that.

Hours before Hamas issued its latest statement, the U.S. said the two sides were not far apart and should do what they could to reach a deal.

Russia launches the biggest airstrike in weeks

On May 8 local time, Russian forces launched another large-scale airstrike on Ukrainian energy facilities, damaging power facilities in six states in central, western and southern Ukraine as well as gas storage facilities in the west.

The Ukrainian side said Russian forces launched 55 missiles and 21 attack drones into the country, of which 39 missiles and 20 drones were intercepted by Ukraine's air defense.

Russia struck the Ukrainian military-industrial complex and energy facilities in retaliation for Ukrainian attacks on Russian energy facilities, the Russian Defense Ministry said. As a result of the strike, Ukraine's ability to produce military-industrial products and to mobilize Western weapons and military equipment to the battlefield has been significantly reduced.

The Verkhovna Rada (Parliament) of Ukraine on the same day successively adopted a draft presidential decree on the further extension of the state of war and military mobilization of the country. According to this draft, the state of war and military mobilization of Ukraine will be extended from 14 May to 11 August. This is the 11th time since the Russian-Ukrainian conflict in February 2022 that the Verkhovna Rada has approved the extension of the said decree.

NY Fed's Perli offers guideposts to measure market liquidity levels

The Fed's announcement a week ago that it will shrink its balance sheet more slowly represents "an important and prudent step" in managing a process that faces a lot of uncertainties over how far it can run without stressing markets, said Roberto Perli, manager of the System Open Market Account (SOMA) at the New York Fed (responsible for implementing Federal Reserve monetary policy).

Perli said the final destination for the Fed's balance sheet remains unknown right now. He also offered some guideposts for how the Fed is watching markets for signs liquidity is tightening in a way that would call for an end to what's commonly referred to as quantitative tightening, or QT. Perli said he's watching "domestic bank activity in federal funds, the timing of interbank payments, the amount of daylight overdrafts, and the share of repo volume trading at or above the interest on reserve balances" rate.

Fed's Collins says reaching the 2% inflation goal may take longer

Boston Fed President Susan Collins said at an event at the Massachusetts Institute of Technology on Wednesday that little progress is made in curbing inflation in 2024, and slower economic growth will be necessary to ensure that inflation will move down to the Fed's 2% target sustainably.

The recent unexpected uptick in economic activity and inflation suggests that policy may need to be held at current levels until we are more confident that inflation is moving sustainably toward 2%. Recent data lead me to believe that this will take more time than previously thought, Collins said.

Bumps in the disinflation process are not surprising, and the current situation requires methodical persistence. Collins recognized that progress will take time and the trend is uneven. Progress on inflation is likely to require lower demand growth, particularly a further slowdown in core non-housing services inflation.

ECB's Holzmann says the ECB cannot ignore the Fed when setting policy

European Central Bank (ECB) Governing Council member Robert Holzmann gave an interview with Germany's Handelsblatt on May 8. Holzmann said that the Federal Reserve's sway over the U.S. dollar gives it an outsized influence, and policymakers will take that into account. To some extent our data and decisions are naturally influenced by the Fed, Holzmann added. "The Fed with the dollar is, figuratively speaking, the gorilla in the room," Holzmann said.

Markets expect the ECB to cut interest rates by 25 basis points in June, a move that would depart from the Fed's policy path of keeping rates high for longer. However, Holzmann, one of the most hawkish members of the ECB Governing Council, warned against hasty action. "The basic prerequisite for the first rate cut must be met, namely that there is a high probability that we will reach our inflation target by mid-2025," said Holzmann. If that time comes in June, further steps will certainly follow. But I see no reason at all for us to cut key rates too much too quickly. Every step we take is dependent on the data available at that time. We will have a lot of new data and forecasts in September and December. However that's hardly the case in July, said Holzmann.

ECB's Wunsch warns of risks to inflation outlook and expects two cuts

Significant risks remain around the trajectory of wage growth and inflation in wage-intensive services, ECB Governing Council member and Belgian central banker Wunsch said in a speech on Wednesday. Wunsch sees a path for initiating rate cuts this year, with room to cut by 50 basis points, but the exact timing will depend on the data. While rate cuts may begin this year, caution is warranted. Monetary policy tightening is synchronized globally, but it seems unlikely that the easing cycle will be synchronized as well.

[Focus of the Day]

UTC+8 19:00 Bank of England Interest Rate Decision (Apr)

UTC+8 19:30 Bank of England Governor Bailey Holds a Monetary Policy Press Conference

UTC+8 20:15 ECB Executive Board Member Cipollone Speaks

UTC+8 20:15 ECB Vice-President Guindos Speaks

UTC+8 23:00 Bank of Canada Governor Macklem and Senior Deputy Governor Rogers Hold a Press Conference

UTC+8 00:15 Next Day: Bank of England Chief Economist Pill Speaks

UTC+8 02:00 Next Day: San Francisco Fed President Daly Participates in a Fireside Chat

Risk Warnings and Disclaimers

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ING

Energy

Energy – US gasoline demand still a concern

Having been under pressure for much of the trading day, oil prices recovered in the latter part of the trading session yesterday and settled higher. However, the broader weakness in the market will likely add further noise around OPEC+ output policy ahead of the next Joint Ministerial Monitoring Committee meeting. OPEC+ members will also become uncomfortable if Brent starts flirting with $80/bbl, a level which is not too far away. As we have mentioned previously, price weakness increases the likelihood that OPEC+ members will fully rollover their 2.2m b/d of additional voluntary cuts into the second half of the year, which risks overtightening the market later in 2024, assuming no downside surprises on the demand side.

The Energy Information Administration's (EIA) weekly inventory report aided the recovery in oil prices yesterday, which contradicted previously released API crude oil inventory numbers. EIA data shows that US commercial crude oil inventories fell by 1.36m barrels over the last week, different to the 500k barrel build the API reported. The decline in crude oil stocks was driven by stronger exports, which increased by 550kk b/d WoW to 4.47m b/d, and stronger refinery activity. Refinery run rates increased by 1pp over the week to 88.5%, which saw crude oil inputs grow 307k b/d WoW. Stronger refinery activity meant gasoline and distillate inventories increased by 915k barrels and 560k barrels respectively, which were still lower than the builds the API reported this week. A recent concern for the oil market has been weaker than usual US gasoline demand. While demand increased over the week, the 4-week average implied gasoline demand is still at its lowest level since 2014 for this stage of the year at 8.63m b/d (excluding 2020 due to Covid). Concerns over gasoline demand have seen the prompt RBOB gasoline crack trade to its lowest level since February.

In Asia, weaker refinery margins will also be a concern and in recent weeks there have been reports of some refiners in the region cutting or set to cut run rates given the weakness. There will probably not be any respite for margins in the short term, particularly after China recently released its second batch of refined product export quotas for the year, totalling 14m tonnes. This takes total quota releases for 2024 to 33m tonnes, 18% higher than the first two batches of last year.

The US Department of Energy (DoE) is looking to purchase up to 3.3m barrels of US sour crude oil for delivery in October 2024, at a price no higher than $79.99/bbl. This is slightly higher than the DoE had previously been willing to pay.

On the energy calendar for today, China will release its first batch of trade data for April, which will include oil import numbers. There will also be the usual weekly release of Singaporean refined product inventories and Insights Global will release data on ARA refined product stocks. Finally, the EIA will release its weekly US natural gas storage report, which is expected to show an increase of around 87Bcf over the last week.

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GBP/USD Key Levels Into BOE, Silver Considers Its Next Breakout

Economic events (times in AEST)

GBP/USD technical analysis:

Silver technical analysis:

Japan's Reserves Tally Likely Too Early to Reflect Intervention

Source: Bloomberg

[Fed] Collins: Lower Demand Growth Will Be Needed to Make Progress on Inflation

Collins' Speech

Oil ETFs Notch Gains as Crude Price Slips

Oil ETFs' Resiliency May Be Short-Lived

Source: etf.com

Bank of England Likely to Move Closer to First Rate Cut Since 2020

Messages For Markets

Source: Reuters

May 9th Financial News

[Quick Facts]

[News Details]

[Focus of the Day]

The Commodities Feed: US Crude Inventories Edge Lower

Energy – US gasoline demand still a concern

Risk Disclosure