The Pound rallies before the BOE and China makes some big moves

February 5, 2015

Only one day after the RBA cut its benchmark interest rate, China’s central bank has also joined the easing factions by lowering their reserve requirement ratio by 0.5% down to 19.5%. The easing policy comes against a backdrop whereby the PMI data for February fell to its lowest level since the year end of 2011 and Mainland China is now experiencing its biggest capital outflow of the 21st century. With decision signals that China has entered into an easing cycle, markets are now expecting an interest rate cut and further reserve ratio reductions throughout the year.

The easing policies, or so-called currency war, of Japan and the Eurozone has indeed lowered their exchange levels and is supporting the USD’s rally. The rally, in return, accelerates the capital outflow of emerging markets, including China, as funds tend to be allocated to the US with a stronger currency. Such outflow has finally urged central banks to provide more easing to relieve domestic liquidity strain. Economists are arguing that the currency war is a vain effort for economic growth as it only intensifies the volatility of capital flow and the exchange rate. However, it appears to be a catch-22 to some central bankers that feel there are no better options.

The USD index surged back to 94.5 as the Euro re-started its drop last night. The political gridlock between Germany and the new Greek government continues as Chancellor Merkel employs a delaying tactic whilst Greek leaders are desperately seeking support with the Euro region for another round of debt arrangements.
The Euro has now broken the flag pattern and is heading to a new low.

EURUSD 050215 | Vantage FX

Across the English Channel is quite another view. The February PMIs of the UK were all higher than expected, increasing the speculation on the BOE’s rate hike. At least, we can see no signs of the BOE shifting its monetary policy to easing like its counterparties – which I personally see is a good reason enough to be bullish on sterling from a fundamental aspect. We also can see a potential head-and-shoulders bottom on the daily chart, implying the rally of the Pound is forthcoming.

GBPUSD 050215 | Vantage FX

Back to the stock markets, the Shanghai Composite lost 0.96% to 3174. The Nikkei Stock Average surged by 1.98%. The Australian ASX 200 surged 1.23% again to new highs of 5777. In European markets, the UK FTSE was down by 0.17%, the German DAX gained 0.19% and the French CAC Index rebounded by 0.39%. The S&P 500 closed 0.42% lower to 2041. The Dow gained 0.1% to 17673, and the Nasdaq Composite Index lost 0.23% to 4716.

On the data front, Australian Retail Sales will be the only event of focus for the Asian session. The Bank of England’s Rate Statement will be released at 23:00 AEDST. The U.S. weekly Unemployment Claims and Trade Balance will be out at 0:30 am AEDST after midnight.

Have a great trading day!
Anthony


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