GBP/USD: Buy at 1.3300, EUR/GBP long at 0.8870

GBP/USD: Carney signals gradual rate hikes

Macroeconomic overview: Bank of England Governor Mark Carney said on Monday that Brexit is likely to hurt Britain's growth prospects in the short term and push up inflation as the country adjusts to life outside the European Union.

In a speech that immediately drew criticism from some Brexit supporters who have previously criticised his stance on the EU, Carney warned that Britain would face a cost for reworking its trade relationships.

In the short term, the weakening of trade ties with its EU partners would not be offset by new agreements with other countries, he said, as he repeated his argument from last week that interest rates would probably need to rise soon.

The BoE surprised financial markets last week when it said most of its policymakers thought it was likely that interest rates would need to rise in the coming months, if the economy and price pressures keep growing.

In his speech on Monday, Carney reiterated that message that record low interest rates could rise in coming months, but added that "any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent".

Sterling retreated on Monday from its highest level since the Brexit vote, after Carney said any coming interest rate rises would be limited and gradual.

We expect the BoE will hike interest rates at November meeting.

Investors are now preparing for potentially more hawkish statements from the Federal Reserve after its two-day policy meeting ends on Wednesday. The Fed is widely expected to announce this week that it will start paring its balance sheet, with the reductions seen likely to start this year.

It is expected to keep rates on hold, but investors will be watching for fresh hints on the chances of another rate rise this year and how many could be expected in 2018.

Technical analysis: Gains consolidate after last week’s rally to 1.3618, the highest for cable since June 2016. The next target for GBP/USD bulls will be 1.3673 (61.8% fibo of 1.5022-1.1491 fall in 2016). A slight corrective move cannot be excluded first.

Short-term signal: Buy at 1.3300

Long-term outlook: Bullish

 

USD/CAD jumps as BoC watching impact of stronger CAD

Macroeconomic overview: Bank of Canada Deputy Governor Timothy Lane said the bank will pay close attention to how the economy responds to both higher interest rates and a stronger Canadian dollar, and remains data-dependent as it looks ahead to further decisions on interest rates.

Lane also said that Canadian households are far more indebted now than they have been in the past when interest rates were closer to neutral, but said a stronger Canadian economy should help boost incomes to help consumer cope with debt costs. He also said low rates helped drive Canada's housing boom, but neither low rates nor double-digit home price appreciation will last.

Lane outlined what went into the bank's unexpected decision to raise rates two meetings in a row, saying the resource economy was rebounding even as the rest of the economy was continuing to grow strongly.

The Canadian dollar weakened sharply against the U.S. currency after Lane’s speech.

Canada's manufacturing sales and wholesale trade data for July are due on Tuesday and Thursday, respectively. The August inflation report and retail sales data for July are due on Friday.

Technical analysis: The USD/CAD broke above and closed above 14-day exponential moving average. 7-day ema is positively aligned, which may signal that the corrective move is likely to last a couple of days. An important resistance level is 76.4% fibo of May 2015-January 2016 rise at 1.2574.

Short-term signal: Yesterday’s rise stopped our short position, but we do not change our medium-term view on this pair. We are looking to sell USD/CAD again at 1.2570.

Long-term outlook: Bearish