lows

GBP: Pay data can keep the Bank of England hawkish for longer

GBP/USD has risen to the highest levels since last April on the back of some strong UK wage data for May. As our UK economist James Smith notes, the upward surprise to UK wage growth is partly down to backward revisions. But that is not a huge comfort because looking at the private sector, which is what the Bank of England focuses on, we have seen another big month-on-month increase in pay. Whether that is partly because of the ongoing passthrough of the new National Living Wage (+10% in April), is not clear. But certainly, these are not figures the BoE will want to see and will maintain the market's exceptionally aggressive pricing of the Bank Rate up near 6.40% early next year.

GBP/USD looks set to extend to 1.30 in this soft dollar environment, while EUR/GBP can retest the lows near 0.8520.

Technical outlook: EURUSD bounced off the 1.0640 lows last week and pushed higher towards 1.0779 on Friday as projected earlier. The bears were quick to take this opportunity and came back in control as the trajectory reversed towards 1.0700-10 to close the week. The single currency pair is seen to be trading close to 1.0700 at this point in writing as the bulls prepare to push towards 1.0760 at least in the near term. EURUSD is unfolding an expanded flat corrective wave at a larger degree from the 1.1035 highs earlier. The first wave lower terminated around 1.0520, while the second wave rallied through the 1.1095 highs before terminating. Since then, the last wave has been underway and is projected to terminate around 1.0500 in the next few trading sessions. EURUSD might have terminated a lower-degree corrective rally at 1.0779 on Friday or it could extend up to the 1.0820-30 area in the next 1-2 trading sessions. The instrument could be trapped in a range for a few sessions before the bears are back in control to drag the price lower towards 1.0500. Watch out for intraday resistance around the 1.0820-30 zone. Trading idea: A potential drop towards 1.0500 is possible in the near term.

AUD: RBA hike is a 50-50 affair The Reserve Bank of Australia has had a tendency to surprise markets in recent months. As it prepares to announce monetary policy tomorrow, markets (40% implied probability of a hike) and consensus are split between a 25bp rate increase and a hold after a set of contrasting data in Australia. We agree that the chances of a hike are very close to 50-50: 1Q wage data pointed to more tightening in our view, but April jobs figures were dismal. When April CPI data was released last week and surprised with a jump to 6.8% year-on-year, and Governor Philip Lowe sounded open to all options by reiterating data-dependency, the probability of a June hike jumped again. In theory, data dependency means that the prospect of a “hawkish hold” or “dovish hike” should not be on the spectrum of possibilities, and even though the shades of central bank communication can admittedly be quite varied and creative (Lowe will speak Wednesday morning), we see tomorrow’s risk event as quite binary for the Australian dollar. A hike could see AUD/USD initiate a move that can take it to stabilise around 0.6700 towards the end of this week; a hold raises the risk of sub-0.6500 lows being tested again soon, even though we think less USD strength can favour stabilisation in the pair regardless of a hawkish surprise by the RBA.

Economic outlook maintains pressure on oil prices Oil prices are trading broadly flat at the start of the week, in keeping with the general feeling in the markets in the absence of any notable catalysts. It has recovered quite well over the last week having fallen back towards the 2023 lows last Monday. It remains in the lower trading range between $70-$80 in Brent and showing little sign of breaking in either direction at this stage. The economic outlook has been a major factor behind its slide this year and some improvements on that side could turn things around for it. The problem is that no major central bank has yet ended its tightening cycle and a number of more rate hikes could still be on the cards. Even those that had previously declared a pause have restarted. A choppy period but what’s going to change for gold? Gold has been very choppy over the last month and recent data and central bank decisions haven’t enabled it to break out of its tight range in either direction. It’s been trapped largely between $1,940 and $1,980 and showing few signs of changing that in the near future. Things can obviously change at any point and there’s plenty of Fed speak this week as well as central bank interest rate decisions. But we’ve just heard the latest thoughts and projections from the Fed so I’m not sure what we’ll learn of particular value. It’s all about the data at this stage.

Oil remains choppy but flat and in lower range Oil prices are relatively flat today, mirroring yesterday’s session which was broadly choppy but ultimately directionless. Crude has rebounded strongly since falling toward its 2023 lows early last week but remains in its lower range, roughly between $70-$80 per barrel and it’s showing little sign of breaking that in the short term. While some believe the market will be in deficit later in the year, aided by the Saudi-driven OPEC+ cuts, which could support prices closer to what we saw late last year and early this, the economy remains one significant downside risk to this amid an adjustment in the markets toward higher rates for longer. Gold drifting as we await more data Gold has started the week slightly softer but very little has changed, in that it remains in the $1,940-$1,980 range that it has spent the vast majority of the last month. It was a very quiet start to the week which is why gold has basically continued to drift and that may continue until we see a significant change in the data. The Fed last week made it perfectly clear that it doesn’t believe it’s done and its commentary this week, including Chair Powell’s appearing in Congress on Wednesday, isn’t likely to change in any significant way from that. It will be interesting to see if we get any response to UK inflation data as a potential signal of stickiness more broadly but then, there’s every chance it could be viewed as a UK issue, rather than an indication of something more, considering how much more the country has struggled until now.

Technical Market Outlook: The GBP/USD pair has rebounced from the lows seen at the level of 1.2690 and is heading higher towards the swing high located at 1.2846. The 50 MA will provide the dynamic resistance for bulls around the level of 1.2804. The momentum is strong and positive, so the short-term outlook for GBP remains bullish. The intraday technical support is seen at the level of 1.2738 and 1.2690.