Forex News

Derek Halpenny at MUFG highlights that the Bank of England left rates unchanged, but signals suggest a hike is likely in November as most of the majority voting bloc see tightening as needed. The surprise came from a major QT overhaul, with paused sales, permanent holdings of long Gilts, and structured sales to the DMO, which ease long-end yield risks and are seen as modestly Pound positive.

BoE QT changes ease long-end risks

"There was only 2bps of hikes priced for the BoE announcement yesterday, so the unchanged policy announcement was no surprise."

"While the rate decision was expected, the updated QT plan was not."

"Thirdly, GBP 146bn worth of Gilts maturing between 2035 and 2049 will be sold at a pace of GBP 20bn per year with these bonds sold directly to the government via the DMO rather than directly to the market via auctions as has been the case under QT so far."

"The active sales of GBP 20bn per year of Gilts maturing between 2035 and 2049 to the DMO rather than to the market is biggest impact here and the 30-year Gilt fell by 12bps yesterday."

"The pound fell yesterday but reduced risks to the Gilt market ahead of the budget on 28th October does also reduce to some degree a negative reaction."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

Rabobank strategists Bas van Geffen and Elwin de Groot expect the European Central Bank (ECB) to raise the deposit facility rate by 25bp to 2.75% in December, driven by higher energy price forecasts. They argue the ECB will not accelerate tightening, see upside risks if inflation broadens, but stress that energy inflation should ease from March, limiting further hikes and making any additional moves largely transitory.

Energy shock drives December tightening

"Our new energy price forecasts make another rate hike more likely than not. We now expect the ECB to raise the deposit facility rate by 25bp in December, to 2.75%. This is not a shift to a stronger policy response."

"So, on balance, we believe that this additional energy shock hits inflation harder and earlier than economic activity. So, logically, some further tightening may be required to keep expectations anchored, and to prevent second round effects. We therefore pencil in an additional rate hike in December."

"Considering that energy prices should start to abate in March, we believe policymakers won’t need to keep up that appearance for much longer. Thus, we forecast just one additional hike."

"The longer high energy prices persist, the greater the risks that such second-round effects could take hold. But that’s precisely what the previous two hikes and a December follow-up seek to mitigate. As long as data and surveys do not indicate that second-round effects may materialise, the ECB need not respond more forcefully."

"We therefore consider any deposit facility rate increases above the current 2.50% to be temporary. The ECB will probably revert these in the second half of 2027. That’s another reason why we haven’t factored in a March hike yet: monetary policy famously works with long and variable lags, so the ECB will probably be looking beyond the tail-end of the energy-driven inflation spike by then."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• NZD/USD declines 0.3% on Friday as the US Dollar regains strength.
• Kevin Warsh’s hawkish remarks reinforce expectations of tighter monetary policy in the United States.
• New Zealand’s trade deficit narrows in August but remains wider than expected.

NZD/USD trades lower around 0.5710 on Friday at the time of writing, down 0.3% on the day. The pair comes under pressure as the US Dollar (USD) regains strength, supported by the hawkish tone adopted by Federal Reserve (Fed) Chair Kevin Warsh, keeping the outlook for US monetary policy at the center of investors’ attention.

Kevin Warsh highlighted that inflation remains uncomfortably high and argued that economic data released over the summer failed to show sufficiently convincing structural improvement. These comments fuel expectations of tighter monetary policy, supporting the US Dollar and exerting downward pressure on NZD/USD.

The CME FedWatch Tool shows that markets now assign a 53% chance to an interest rate hike at the Fed’s October meeting, up from 44% a day earlier. This repricing of the US interest rate outlook favors the Greenback as investors factor in the possibility that restrictive monetary conditions could remain in place for longer.

On the New Zealand side, monetary policy expectations nevertheless provide some support to the New Zealand Dollar (NZD). Markets assign a 60% chance that the Reserve Bank of New Zealand (RBNZ) will raise its policy rate to 3% at its upcoming monetary policy meeting in October.

New Zealand’s latest trade data also paint a mixed picture. The Trade Balance deficit narrowed to NZ$1.35 billion in August from NZ$2.12 billion in July but remains wider than the NZ$1.275 billion deficit expected by the market consensus.

Exports rose 15.4% YoY in August to NZ$6.66 billion, following a revised 10.8% increase in July. Meanwhile, Imports increased 13.1% YoY to NZ$8 billion after rising 28.4% in the previous month. Despite the improvement in the trade balance, renewed US Dollar strength currently dominates NZD/USD price action.

NZD/USD technical analysis

In the one-hour chart, NZD/USD trades at 0.5712, retaining a bearish near-term bias as it holds beneath the 100-period simple moving average (SMA) at 0.5746 and the 200-period SMA at 0.5789. The pair also remains capped by the downward resistance trend line at 0.5752, while the Relative Strength Index (RSI) around 37 leans toward weak downside momentum rather than any oversold climax.

On the topside, initial resistance appears at the horizontal barrier near 0.5728, ahead of the trend-line at 0.5752 and the clustered 100- and 200-period SMAs further up. On the downside, immediate support is seen at 0.5703, with a deeper floor at 0.5670, and a sustained move below these levels would likely extend the current bearish phase.

(The technical analysis of this story was written with the help of an AI tool. Know more.)

Nordea strategists expect the Federal Reserve (Fed) to deliver two additional rate hikes, arguing that resilient United States (US) growth, persistent inflation and continued labour-market strength suggest monetary policy is not yet sufficiently restrictive. They also see AI-related investment and competition for scarce labour and other resources as factors that could sustain wage and inflation pressures.

Resilient US data backs more tightening

"The US economy remains resilient, while inflationary pressures show few signs of easing. With the labor market also holding up well, the case for a more restrictive monetary policy stance is strengthening. While we maintain our forecast for two more hikes, we see the risks as tilted to the upside."

"All in all, monetary policy does not appear sufficiently restrictive given the strength of the economy. Persistent inflation pressures, combined with a resilient labor market, argue for a more restrictive policy stance. The Committee appears to recognize this, with the median dot for year-end now implying another hike."

"We expect this hike to be delivered, followed by another hike next year, as inflationary pressures are likely to persist. The risks to our rate outlook remain tilted to the upside."

"Given the limited supply of new labor, continued job growth could further tighten the labor market and put downward pressure on the unemployment rate. Warsh reaffirmed this assessment at the press conference, noting that the US economy is operating at more or less full employment. Combined with strong economic growth, continued labor market strength could eventually translate into faster wage growth and renewed wage pressures, making inflation more persistent."

"Secondly, AI-related demand remains massive, with investment flowing into the economy and supporting overall demand. The buildout of data centers is competing for scarce resources, including electricity, commodities and construction capacity. Data centers are also competing with factories for skilled workers such as electricians and engineers, with the Fed specifically noting higher wages in specialty construction trades linked to the AI buildout."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• EUR/GBP trades flat as upbeat UK Retail Sales data supports the British Pound.
• The BoE’s less hawkish stance keeps Sterling vulnerable.
• The cross remains within its month-long range as traders weigh the BoE and ECB outlooks.

EUR/GBP trades little changed on Friday as stronger-than-expected UK Retail Sales data lends some support to the British Pound (GBP) after it came under pressure following the Bank of England’s (BoE) monetary policy announcement on Thursday. At the time of writing, the cross trades around 0.8587, staying within the narrow range that has been in place for more than a month.

Data released by the Office for National Statistics showed that UK Retail Sales rose 0.5% MoM in August, beating expectations for a 0.2% decline. On an annual basis, sales increased 2.4%, above the 1.9% forecast. Retail Sales excluding fuel also rose 0.6% MoM and 2.7% YoY.

The BoE kept interest rates unchanged at 3.75% for the sixth straight meeting in a 6-3 vote. Policymakers said there has been little evidence so far of significant second-round effects from higher Oil prices on domestic prices and wages, although they acknowledged that inflation risks are tilted to the upside

The decision left the BoE looking less hawkish than several other major central banks and weighed on the Pound. The Bank of Japan (BoJ) raised interest rates by 25 basis points earlier on Friday, following similar moves from the Federal Reserve (Fed) this week and the European Central Bank (ECB) earlier this month.

Still, BoE Governor Andrew Bailey kept the door open to future rate hikes, saying, “If the conflict in the Middle East persists for an extended period, as appears to be the case, and the risk of second-round effects emerging increases, it is likely that policy may have to tighten.”

Brown Brothers Harriman’s Elias Haddad points out that market pricing for the Bank of England remains aggressive, with “the swaps curve continues to imply about 100bps of BoE rate hikes in the next twelve months to 4.75%.”

However, BBH argues “the BoE may not need to tighten as much as markets expect,” noting that “the UK economy is already operating below capacity, Bank Rate at 3.75% is near the top of the BoE’s estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive.” BBH concludes that the “bottom line: GBP remains vulnerable to a dovish BoE repricing.”

On the Euro (EUR) side, ECB President Christine Lagarde said on Friday that growth is “a bit more promising than we thought,” while adding that policymakers are “not seeing second-round effects yet.” She stressed that energy is a significant variable and that the ECB is well positioned to respond, but said interest-rate decisions will be made “meeting by meeting.”

Brown Brothers Harriman’s (BBH) Elias Haddad highlights pronounced Japanese Yen (JPY) underperformance, with USD/JPY near 158.00 after a Bank of Japan rate hike to 1.25%. The Bank of Japan (BoJ) signaled cautious tightening, expecting only moderate growth and delayed achievement of 2% inflation. BBH concedes its bearish USD/JPY view is wrong and flags key resistance at 158.42 and 160.00, where FX intervention risks rise.

Yen slump and BoJ caution

"JPY is underperforming across the board, with USD/JPY up nearly two big figures to 158.00. The Bank of Japan delivered on expectations but kept the bar high for a more hawkish stance. As was widely expected the BoJ raised the policy rate 25bps to 1.25% and reiterated that it “will continue to raise the policy interest rate.” The signals were cautious:"

"First, the 7-2 vote in favor of a hike, included two dissents (Asada Toichiro and Sato Ayano) in favor of holding rates steady."

"Second, the BoJ expects growth to moderate and underlying inflation to reach 2% only between the second half of fiscal 2026 and fiscal 2027."

"Third, BoJ Governor Kazuo Ueda warned that rapid rate hikes could unsettle asset prices, adding that it could take some time to confirm that 2% inflation is entrenched. To his point, headline and core CPI inflation remained under 2% y/y in August."

"Bottom line, the Fed’s hawkish hike and the BoJ’s cautious tightening tilt USD/JPY higher, leaving our bearish USD/JPY view plainly wrong. The next two key resistance levels for USD/JPY are offered at 158.42, the 200-day moving average, and 160.00. FX intervention risk will increase as we get closer to 160.00, raising the cost of shorting JPY and limiting the scope for an overshoot."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)

• XAG/USD rallies above $67.00 after bouncing from the $62.00 area earlier this week.
• The precious metals are rallying sharply as US long-term yields retreat from highs.
• Silver bulls are likely to be tested at the $68.00 area.

Silver (XAG/USD) trades higher for the second consecutive day on Friday, reaching session highs above $67.00 after bouncing from lows near $62.00 earlier this week. Precious metals have drawn support from a moderate reversal in US Treasury yields in the second half of the week, which has offset the negative impact of the Federal Reserve’s hawkish hike.

The Fed raised its benchmark interest rate by a quarter-point to the 3.75-4% band on Wednesday, and Chairman Kevin Warsh reaffirmed the bank’s commitment to fight inflation, hinting at further monetary tightening ahead.

The decision boosted the US Dollar but also triggered a relief in bond markets as confidence in the central bank’s independence was restored. The US benchmark 10-year yield retreated below the critical 5% level, which provided a fresh impulse to the yieldless precious metals.

Technical Analysis: Silver bulls are likely to be tested above $68.00

XAG/USD has bounced from a key support area around $62.00 this week and is heading to resistance just above the $68.00 level, which capped rallies several times earlier in September. Momentum has improved, but indicators in the daily chart remain mixed, with the Relative Strength Index (14) hovering near 56 and the Moving Average Convergence Divergence (MACD) marginally below zero, suggesting that bullish attempts lack follow-through for now.

Bulls need to breach the mentioned resistance above $68.00 (September 4, 9 highs), which closes the path towards the mid-June and late-August highs above $71.00 and the 200-day Simple Moving Average (SMA) at $73.18.

On the downside, session lows near $65.20 are likely to test bears ahead of the mentioned key support area between $62.20 and $63.05, the bottom of the last two months' trading range and the headline of a bearish Head& Shoulders pattern.

(The technical analysis of this story was written with the help of an AI tool. Know more.)