Pound weaker due to dissenter and less hawkish MPC statement
Sentiment can push the markets just as quick as a change in fundamentals or a technical level is reached. Sometimes all 3 get caught up in confusion whilst the short-term speculators move in or out of a position based on their read of the situation, whilst the longer-term players use the opportunity to add to their position. Fundamentally, the BoE are in a rate hike cycle and doing their best to reduce inflation by cooling demand. Speculators who were banking on the number of rate hikes not going lower were spooked by the 1 dissenter who called for no change and a possible reduction in the number of rate hikes the MPC will deliver this year.
According to a report released by the Energy Information Administration on Thursday, gas in storage dropped more than expected by 79 billion cubic feet to land at 1,440 billion cubic feet. On a year-over-year basis, gas stocks were 344 billion cubic feet lower than in the previous year, and 304 billion cubic feet below the five-year average of 1,744 billion cubic feet. The EIA concluded that total working gas remained within historical ranges at 1,440 billion cubic feet.
The decrease in gas was accompanied by a headline breaking from the Kremlin that the talks between the Russian and Ukrainian delegation had not progressed. This sent the price of crude higher, and into last Fridays low, which I had marked up as being the first level of resistance.
The ActivTrader sentiment indicator is showing an extreme level of bullish sentiment and these traders are usually on the wrong side of the price action. So, I am expecting a pullback to ensue into the end of the week. Even if it is only down to yesterday’s high at $101.95.
In the week ending March 12, the advance figure for seasonally adjusted initial claims was 214,000, a decrease of 15,000 from the previous week's revised level. The previous week's level was revised up by 2,000 from 227,000 to 229,000. The 4-week moving average was 223,000, a decrease of 8,750 from the previous week's revised average. The previous week's average was revised up by 500 from 231,250 to 231,750. This is the lowest reading for 10-weeks.
As expected, industrial production increased by 0.5% in February compared with the previous month, the Federal Reserve's Board of Governors reported on Thursday. Compared to February 2021, manufacturing increased by 7.4%.
The US data although more positive than expected was unable to give the US dollar any support. The EURUSD was higher on a comment about two rate hikes this year by ECB member Knot. With a tightening within Q4 this year a realistic assumption. No bad news from Ukraine came to undo the bullishness. And with an ActivTrader sentiment indicator reading 75% short, there is still some upside potential in the EURUSD which will keep adding pressure to the US dollar index. My idea of being patient and waiting for a bounce higher is now invalidated.
Eurostat's final report published this morning showed that inflation in the Eurozone rose to 5.9% in February, 0.8 percentage points higher than in January. In the final report, the figure was 0.1% higher than in the preliminary report. As a result of the events in eastern Europe, central bank officials have further projected inflation to rise from the 5.5% recorded in January 2022 to approximately 8% in the second quarter of 2022.
The Monetary Policy Committee (MPC) of the Bank of England (BoE) voted 8-1 on Thursday to raise the Bank Rate to 0.75%. The only official who did not agree with the move preferred to maintain the main interest rate at 0.50%. The MPC pointed out that its current view is that "some further modest tightening in monetary policy may be appropriate in the coming months." The overall statement was deemed to be less hawkish than before, and the pound quickly adjusted lower.
I am going to step aside from the GBPUSD for the rest of the week as today we rose up to resistance and fell back to support. Meaning we now must wait for them to pick a direction. I would take a break of today’s high or low as the first indication of a possible start to a larger move.