Sive Morten
Special Consultant to the FPA
- Messages
- 18,571
Fundamentals
"Alpha Now" guys, has prepared excellent research on recent BoE decision. Mostly this is continuation of our previous analysis which suggests that BoE will not rise rate any time soon. This already has led to miserable plunge of GBP and agrees with our long-term technical view:
UK’s Monetary Policy Committee largely validated the substantial shift in expectations regarding the timing of the first UK rate hike that has occurred between the August and November Inflation Reports. We have long argued that Bank Rate is set to remain on hold for an extended period of time because excessive levels of household debt mean that the economy is not ready for tighter policy. The MPC believes that a lower path for interest rates is necessary in order to stimulate domestic demand as an offset to weaker demand from abroad. However, while China’s economy has slowed considerably, we judge that the direct impact of China’s dramatic slowdown on global growth will be small. Nevertheless, the Bank of England has identified financial contagion from China as a key downside risk. We agree wholeheartedly.
On 5 November, the Bank of England simultaneously published the MPC’s latest policy decision, the Minutes of the meeting that produced that decision, and the November Inflation Report. These releases have been interpreted as dovish, with the Committee voting 8 to 1 against raising rates. Prior to the announcement, it had been rumoured that Kristen Forbes or Martin Weale — both more hawkish members of the Committee — might join Ian McCafferty in voting for a hike. This did not materialise. The stock of assets purchased under the Bank’s QE programme was also left unchanged, at £375 billion. Interestingly, the Committee revealed that it would not consider reducing the holdings of gilts until it had raised interest rates to 2 per cent.
Prior to the announcement, market implied expectations regarding the timing of the first UK rate hike had shifted from spring of next year to late 2016 / early 2017. The MPC largely validated this movement, implying that it would be necessary in order to offset external weakness.
Indeed, according to Mr Carney, “monetary policy must continue to balance two fundamental forces — domestic strength and foreign weakness.” Reflecting this, the Bank’s forecasts suggest that even if rates do not rise until 2017, there is only a small risk of overshooting the Bank’s 2% inflation target. In response, sterling fell one and a half cents against the US dollar.
Global growth concerns
The Minutes made particular reference to the MPC’s global growth outlook, stressing that it had deteriorated since the August Inflation Report. While the Bank acknowledged that the direct effects from China’s slowdown on UK output were likely to be relatively small, it remains worried about indirect effects — highlighting both trade and financial linkages as particular areas of concern.
Within the Inflation Report, the Bank attempted to measure the degree to which these various linkages would weigh on the UK economy. Its model suggests that a 3.0% drop in Chinese GDP relative to its trend would subtract 0.3% from UK GDP.
With this in mind, the MPC has revised down its forecast for UK growth both this year and next by 0.1 and 0.2 percentage points, respectively. In contrast to the Committee, we believe that the direct impact of China’s dramatic slowdown on global growth will be small. Where we agree, however, is that financial contagion from China poses a downside risk.
According to BIS data, UK domiciled banks hold more than one third of all international banking exposures to China and Hong Kong. Our analysis of published accounts suggests that around 90% of this exposure is concentrated in HSBC and Standard Chartered. We also calculate that HSBC has around 10% of its assets in China and Hong Kong, while Standard Chartered has around 30%.
The danger that this poses has not gone unnoticed by the Bank of England, which has designated a deterioration in global economic conditions triggered by China’s hard landing a key scenario in its 2015 banking sector stress tests — the results of which are due to be published on 1 December.
The Bank also highlighted its concerns in the Inflation Report, writing “UK-owned banks with exposures to China could suffer losses, which in turn, might bear down on their ability to lend. There may also be an increase in funding costs; increasing the cost of borrowing for both businesses and households.” Against this backdrop, Tuesday’s announcement that Standard Chartered is to cut 15,000 jobs and raise significant amounts of additional capital is surely no coincidence.
The MPC’s hands are tied
Supported by the plethora of releases, we stand by our call that the Bank of England’s Monetary Policy Committee is unlikely to raise Bank Rate before 2017. Back in January, when we first made this call, we were out on a limb with both market implied pricing and other economic forecasters suggesting that the Committee would tighten much sooner. Now we are not so alone, with market implied pricing having drifted closer to our own view.
We have long considered excessive levels of household debt a constraint on policy normalisation. This remains the case, with UK household debt still in excess of 140% of disposable income. Now, with China in the midst of a hard landing, we believe that the MPC has something new to fear in the form of financial contagion.
Technicals
Today, guys, we put research on GBP, since patterns that are forming there look brighter compares to any other major currency. At the same time similar scenario we could expect on other currencies. Thus, on EUR, our suggestion on gradual action to parity is confirming, and next destination should be 1.04 lows probably. On NZD our B&B "Sell" almost has reached target and should do this finally very soon.
We look at GBP very often recently, mostly because it provides large strategic scale picture. Market swings that could be formed in perspective of 1 year look really stunning.
"As usual, we continue to keep our long-term analysis that we’ve made in December 2013 in our Forex Military School Course, where we were learning Elliot Waves technique.
Long Term Forecast on GBP rate
Our long term analysis suggests first appearing of new high on 4th wave at ~1.76 level and then starting of last 5th wave down. First condition was accomplished and we’ve got new high, but it was a bit lower – not 1.76 but 1.72. This was and is all time support/resistance area. Now we stand in final part of our journey. According to our 2013 analysis market should reach lows at 1.35 area. Let’s see what additional information we have right now."
Trend is bearish here, but GBP is not at oversold. Couple of months ago market has reached strong support area – Yearly Pivot support 1 and 5/8 major monthly Fib level. Market gradually was struggling through YPS1 but it seems that first attempt to pass through it has failed.
Our conclusion was - GBP will continue move down, but after some retracement.Right now it seems that downward action is re-establishing. Also we have huge AB-CD pattern that specifies target with more precision. It is not quite 1.35, actually it is 1.3088.
August month has become bearish grabber that suggests taking out of 1.45 lows. So we have pattern on monthly chart that gives us clear direction for considerable time period. September has become also a bearish grabber and take a look October - as well. It means that market gradually was challenge upside action but fails within 3 recent month. November has started with miserable drop, may be it will become grabber as well... Anyway, now we see clear signs that market starts action to challenge 1.4650 support for second time and this time could become successful.
Appearing of these patterns let's us easily specify conditions of validity of bearish scenario. It probably will be valid until market will stay below 1.5930 top.
Since market has not taken out yet 1.4650 lows, theoretically, as opposite action to our bearish scenario we could suggest minor AB-CD upside action. But right now, this perspective is mostly just hypothetical, since Fundamental picture and technical analysis on lower time frames suggest further downward continuation. Mostly all real chances on this perspective, I mean AB-CD have been destroyed by BoE comments and decision. So, right now our next target here is 1.4650 lows.
Weekly
This chart has changed drastically as BoE brings clarity in overall picture. Upward scenario hardly will happen any time soon. Right now as EU as UK are hostages of their own monetary policy compares to Fed one. While Fed gets positive stats and prepares to rate hiking, EU brings dovish comments and increase QE program. So do UK. Last week candle has become a bearish grabber, but simultaneously has completed its target.. Trend is bearish here.
Besides of 1.4550 lows, we have two other targets. First one is mostly strategical, and it stands around 1.42 area. It suggests taking out 1.4560 lows and trigger stops that right now are below it. This is butterfly destination point and minor 0.618 extension of large AB-CD pattern
But tactically, we have 1.48 oversold level. Although it does not coincide with any Fib support, this will be important area that could stop market for some time. We do not plot pivots just because Cable has broken MPS1 already. By the way this also tells on appearing new bear trend...
Daily
Technical signs correctly indicated market weakness last week. As a result we've got bearish breakout of wide triangle consolidation. So, two points should be said here. First is - as recent plunge was really strong, it tells that we will get continuation to next butterfly target - 1.618 @ 1.48. Pay attention that butterfly destination coincides with weekly oversold...
Second - right now market stands at Fib support, daily oversold and butterfly 1.27 point. Odds suggest appearing of retracement up on next week. Based on this chart most logical target of retracement is former border of triangle - 1.51-1.5150 area:
4-hour
Here we've got level that market could reach on retracement. Very good area is 1.5180-1.52. This is WPP and K-support on 4-hour chart. It also stands around lower border of daily triangle and it would be better if GBP will stay out from it.
At the same time, retracement probably should be deep, since market stands at solid Agreement support and oversold. It would be nice if we will get, say, B&B "Sell" here.
Conclusion:
Our bearish long-term view has got confirmation from recent statistics and BoE decision. Fundamental analysis suggests that hardly situation will improve significantly in near term, thus, GBP mostly will gravitate to downside action, especially due opposite policy on USD by Fed. This let's us create target steps on a way
down. On coming week it will be 1.48 probably
But first, market could show upside bounce to 1.5150-1.52 area since it stands at support and daily oversold. This bounce could let us to take short position of scale-in if you already have it.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
"Alpha Now" guys, has prepared excellent research on recent BoE decision. Mostly this is continuation of our previous analysis which suggests that BoE will not rise rate any time soon. This already has led to miserable plunge of GBP and agrees with our long-term technical view:
UK’s Monetary Policy Committee largely validated the substantial shift in expectations regarding the timing of the first UK rate hike that has occurred between the August and November Inflation Reports. We have long argued that Bank Rate is set to remain on hold for an extended period of time because excessive levels of household debt mean that the economy is not ready for tighter policy. The MPC believes that a lower path for interest rates is necessary in order to stimulate domestic demand as an offset to weaker demand from abroad. However, while China’s economy has slowed considerably, we judge that the direct impact of China’s dramatic slowdown on global growth will be small. Nevertheless, the Bank of England has identified financial contagion from China as a key downside risk. We agree wholeheartedly.
On 5 November, the Bank of England simultaneously published the MPC’s latest policy decision, the Minutes of the meeting that produced that decision, and the November Inflation Report. These releases have been interpreted as dovish, with the Committee voting 8 to 1 against raising rates. Prior to the announcement, it had been rumoured that Kristen Forbes or Martin Weale — both more hawkish members of the Committee — might join Ian McCafferty in voting for a hike. This did not materialise. The stock of assets purchased under the Bank’s QE programme was also left unchanged, at £375 billion. Interestingly, the Committee revealed that it would not consider reducing the holdings of gilts until it had raised interest rates to 2 per cent.
Prior to the announcement, market implied expectations regarding the timing of the first UK rate hike had shifted from spring of next year to late 2016 / early 2017. The MPC largely validated this movement, implying that it would be necessary in order to offset external weakness.
Indeed, according to Mr Carney, “monetary policy must continue to balance two fundamental forces — domestic strength and foreign weakness.” Reflecting this, the Bank’s forecasts suggest that even if rates do not rise until 2017, there is only a small risk of overshooting the Bank’s 2% inflation target. In response, sterling fell one and a half cents against the US dollar.
Global growth concerns
The Minutes made particular reference to the MPC’s global growth outlook, stressing that it had deteriorated since the August Inflation Report. While the Bank acknowledged that the direct effects from China’s slowdown on UK output were likely to be relatively small, it remains worried about indirect effects — highlighting both trade and financial linkages as particular areas of concern.
Within the Inflation Report, the Bank attempted to measure the degree to which these various linkages would weigh on the UK economy. Its model suggests that a 3.0% drop in Chinese GDP relative to its trend would subtract 0.3% from UK GDP.
With this in mind, the MPC has revised down its forecast for UK growth both this year and next by 0.1 and 0.2 percentage points, respectively. In contrast to the Committee, we believe that the direct impact of China’s dramatic slowdown on global growth will be small. Where we agree, however, is that financial contagion from China poses a downside risk.
According to BIS data, UK domiciled banks hold more than one third of all international banking exposures to China and Hong Kong. Our analysis of published accounts suggests that around 90% of this exposure is concentrated in HSBC and Standard Chartered. We also calculate that HSBC has around 10% of its assets in China and Hong Kong, while Standard Chartered has around 30%.
The danger that this poses has not gone unnoticed by the Bank of England, which has designated a deterioration in global economic conditions triggered by China’s hard landing a key scenario in its 2015 banking sector stress tests — the results of which are due to be published on 1 December.
The Bank also highlighted its concerns in the Inflation Report, writing “UK-owned banks with exposures to China could suffer losses, which in turn, might bear down on their ability to lend. There may also be an increase in funding costs; increasing the cost of borrowing for both businesses and households.” Against this backdrop, Tuesday’s announcement that Standard Chartered is to cut 15,000 jobs and raise significant amounts of additional capital is surely no coincidence.
The MPC’s hands are tied
Supported by the plethora of releases, we stand by our call that the Bank of England’s Monetary Policy Committee is unlikely to raise Bank Rate before 2017. Back in January, when we first made this call, we were out on a limb with both market implied pricing and other economic forecasters suggesting that the Committee would tighten much sooner. Now we are not so alone, with market implied pricing having drifted closer to our own view.
We have long considered excessive levels of household debt a constraint on policy normalisation. This remains the case, with UK household debt still in excess of 140% of disposable income. Now, with China in the midst of a hard landing, we believe that the MPC has something new to fear in the form of financial contagion.
Technicals
Today, guys, we put research on GBP, since patterns that are forming there look brighter compares to any other major currency. At the same time similar scenario we could expect on other currencies. Thus, on EUR, our suggestion on gradual action to parity is confirming, and next destination should be 1.04 lows probably. On NZD our B&B "Sell" almost has reached target and should do this finally very soon.
We look at GBP very often recently, mostly because it provides large strategic scale picture. Market swings that could be formed in perspective of 1 year look really stunning.
"As usual, we continue to keep our long-term analysis that we’ve made in December 2013 in our Forex Military School Course, where we were learning Elliot Waves technique.
Long Term Forecast on GBP rate
Our long term analysis suggests first appearing of new high on 4th wave at ~1.76 level and then starting of last 5th wave down. First condition was accomplished and we’ve got new high, but it was a bit lower – not 1.76 but 1.72. This was and is all time support/resistance area. Now we stand in final part of our journey. According to our 2013 analysis market should reach lows at 1.35 area. Let’s see what additional information we have right now."
Trend is bearish here, but GBP is not at oversold. Couple of months ago market has reached strong support area – Yearly Pivot support 1 and 5/8 major monthly Fib level. Market gradually was struggling through YPS1 but it seems that first attempt to pass through it has failed.
Our conclusion was - GBP will continue move down, but after some retracement.Right now it seems that downward action is re-establishing. Also we have huge AB-CD pattern that specifies target with more precision. It is not quite 1.35, actually it is 1.3088.
August month has become bearish grabber that suggests taking out of 1.45 lows. So we have pattern on monthly chart that gives us clear direction for considerable time period. September has become also a bearish grabber and take a look October - as well. It means that market gradually was challenge upside action but fails within 3 recent month. November has started with miserable drop, may be it will become grabber as well... Anyway, now we see clear signs that market starts action to challenge 1.4650 support for second time and this time could become successful.
Appearing of these patterns let's us easily specify conditions of validity of bearish scenario. It probably will be valid until market will stay below 1.5930 top.
Since market has not taken out yet 1.4650 lows, theoretically, as opposite action to our bearish scenario we could suggest minor AB-CD upside action. But right now, this perspective is mostly just hypothetical, since Fundamental picture and technical analysis on lower time frames suggest further downward continuation. Mostly all real chances on this perspective, I mean AB-CD have been destroyed by BoE comments and decision. So, right now our next target here is 1.4650 lows.
Weekly
This chart has changed drastically as BoE brings clarity in overall picture. Upward scenario hardly will happen any time soon. Right now as EU as UK are hostages of their own monetary policy compares to Fed one. While Fed gets positive stats and prepares to rate hiking, EU brings dovish comments and increase QE program. So do UK. Last week candle has become a bearish grabber, but simultaneously has completed its target.. Trend is bearish here.
Besides of 1.4550 lows, we have two other targets. First one is mostly strategical, and it stands around 1.42 area. It suggests taking out 1.4560 lows and trigger stops that right now are below it. This is butterfly destination point and minor 0.618 extension of large AB-CD pattern
But tactically, we have 1.48 oversold level. Although it does not coincide with any Fib support, this will be important area that could stop market for some time. We do not plot pivots just because Cable has broken MPS1 already. By the way this also tells on appearing new bear trend...
Daily
Technical signs correctly indicated market weakness last week. As a result we've got bearish breakout of wide triangle consolidation. So, two points should be said here. First is - as recent plunge was really strong, it tells that we will get continuation to next butterfly target - 1.618 @ 1.48. Pay attention that butterfly destination coincides with weekly oversold...
Second - right now market stands at Fib support, daily oversold and butterfly 1.27 point. Odds suggest appearing of retracement up on next week. Based on this chart most logical target of retracement is former border of triangle - 1.51-1.5150 area:
4-hour
Here we've got level that market could reach on retracement. Very good area is 1.5180-1.52. This is WPP and K-support on 4-hour chart. It also stands around lower border of daily triangle and it would be better if GBP will stay out from it.
At the same time, retracement probably should be deep, since market stands at solid Agreement support and oversold. It would be nice if we will get, say, B&B "Sell" here.
Conclusion:
Our bearish long-term view has got confirmation from recent statistics and BoE decision. Fundamental analysis suggests that hardly situation will improve significantly in near term, thus, GBP mostly will gravitate to downside action, especially due opposite policy on USD by Fed. This let's us create target steps on a way
down. On coming week it will be 1.48 probably
But first, market could show upside bounce to 1.5150-1.52 area since it stands at support and daily oversold. This bounce could let us to take short position of scale-in if you already have it.
The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.