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Sterling Hammered as BoE Paints a Slower Rate Path ahead, Dollar and Yen Strong on Trade War

Sterling falls sharply today even though BoE delivers the highly anticipated rate hike. Selloff comes in after the dovishness as seen in the inflation report is confirmed by Carney’s press conference. Australian Dollar and New Zealand Dollar follow as the second weakest on risk aversion. The stock markets are in deep worry over further escalation in US-China trade tension. On the other hand hand, Yen is the clear winner today on risk aversion. Dollar follows as the second strongest as it always benefits from heat up in trade war.

In other markets, European indices are all in red today. FTSE is trading down -0.92% at the time of writing, DAX Is down -1.55% and CAC is down -0.63%. Earlier today, China Shanghai SSE closed down -2.0% at 2768.02. 2700 is now back in radar. Hong Kong HSI lost -2.21% and Nikkei dropped -1.03%. The usually resilient Singapore Strait Times also declined -1.28%. US futures point to lower open and DOW could lose triple digit in initial trading. WTI crude oil is back at 67.27 after failing to sustain above 70. Gold edges lower today but is still staying above 1211.65 support, July’s low. At the time of writing, 10 year yield is trading at 2.988 and a point to watch is whether is will regain 3% handle again.

Technically, GBP/USD’s sharp fall and break of 1.3070 finally indicates completion of recent corrective rebound from 1.2956, at 1.3212. Deeper fall should now be seen back to 1.2956 low. GBP/JPY’s break of 145.25 resumes recent fall from 149.30 for 143.18/76 key support zone. While Dollar is strong, it’s still held in range of 1.1574/1790 in EUR/USD, 0.7309/7483 in AUD/USD. And even GBP/USD is holding above 1.2956 low. More is needed to trigger an upside breakout in the greenback. Probably, non-farm payrolls tomorrow is the one that makes it.

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BoE hikes but delivers dovish projections, Carney said policy needs to walk not run

BoE announced to raise Bank Rate by 25bps to 0.75% today, as widely expected. While the voting was unanimous 9-0, the overall announcement is seen as dovish, which is later confirmed in Governor Mark Carney’s press conference. BoE maintained tightening bias and said “ongoing tightening of monetary policy over the forecast period would be appropriate”. However, the pace of rate hike will be gradual and limited.

The new projections in the quarterly Inflation Report suggests that after this rate hike, there would be a lot of room for BoE to wait and see. And, there could be only one more hike within the forecast horizon through Q3 2021. That’s how “gradual and limited” the rate path can be.

In the current conditioning path, the Bank rate will hit 0.9% in Q4 2019 1.1% in Q4 2020 and stay there still Q3 2021. In May’s conditioning path, the Bank rate will reach 1.0% already in Q3 2019, and then 1.2% in Q3 2020 and stays there still Q2 2021. That is, the current path argues that the next hike could happen in Q1 2020, instead of Q3 2020. And there could be no more rate hike in the forecast horizon.

Also, with such conditioning path, GDP (exclude backcast) is projected to growth faster by 1.5% in the four-quarter to Q3 2018, and 1.8% in the four-quarter to Q3, 2019. But GDP growth in the four-quarter to Q3 2020 is unchanged at 1.7%. Inflation will return to target later at 2.0% in Q3 2021, instead of Q3 2020. But, at 2.2% in Q3 2019