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Bank of England cuts growth forecasts, Japan likely to go forward with sales tax hike

Accendo Markets
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The Bank of England recently cut its growth forecast, as shown in Figure 1, and inflation forecast as shown in Figure 2, respectively. In Figure 1, the left of the first vertical dashed line represents the likelihood of revisions (green bands – most likely). The Monetary Policy Committee believes that future growth will lie in the dark green band. GDP is also likely to fall due to the weak global outlook which is the reason why there is a decline in Figure 1.

A decline in Figure 2 is due to a fall in commodity prices which translates to lower import costs for firms. Wage growth still remains a concern for the BoE as this will help fuel inflation. It currently remains below inflation which is also a factor of the decline in CPI.

Figure 1: GDP Growth Forecast, Date on X-axis and Percent on Y axis (Source:BoE)

Figure:2 CPI Forecast, Date on X-axis, Y-axis percentage for CPI, right of red vertical band is forecasts (Source:BoE)

It is therefore highly unlikely that the BoE will raise interest rates anytime soon although it is anticipated that rates will rise in Q3 2015.

Recent data shows that the Eurozone is showing signs of life after recording a 0.2% expansion in growth. However, this could be short lived as the Bank of Japan recently eased monetary policy. This reduced the value of the Yen and should, therefore, increase international competitiveness of Japanese firms and because of this it is likely the Eurozone will struggle to compete with Japan. This could result in the continued weakness in the Eurozone which will therefore inevitably affect the UK. Lastly, the UK continues to achieve the strongest growth amongst the G7 counterparts.

The BoJ surprised markets last month with its additional monetary easing in its bid to meet the benchmark inflation rate of 2% next year. Growth forecasts have also been cut due to the weak global outlook and this has raised questions whether an additional sales tax hike from 8% to 10% will be necessary as the Japanese economy may not be available to handle it. However, the decision is likely to be made in December 2014, with it being implemented in October 2015 as Japan needs to reduce their fiscal deficit.

Easing is also likely to continue to help support the economy and to ensure that the BoJ meets the 2% target inflation rate.

The pair was in a steep uptrend and has now stabilised. We have identified S1 to be a weak floor for the pair which has tested this level once as a resistance level and failed to break it. S2 is a similar case. The pair has tested this level once and has failed to break it therefore S2 is a weak secondary floor for the pair.

R1 is a strong ceiling and the pair has not tested this level since mid-September 2008. This test was when R1 was a support level and the pair has tested this level three times. Therefore, R1 is a strong ceiling for the pair. R2 has been tested once in early-September 2008. The pair failed to break this level therefore R2 is a moderately strong ceiling for the pair.

Technicals: MACD (Moving Averages Convergence Divergence) and MAs (Moving Averages)

• The 50-day MA (magenta) and 200-day MA (orange) are upward sloping indicating a bullish stance for the pair. The 200-day MA and 50-day MA will provide additional support to the pair.

• The MACD is above zero and is above the red signal line indicating a bullish stance for the pair.

In the long-term the pair is bullish. The UK is much stronger than Japan. More additional easing is likely in Japan which will further depreciate the Yen. The UK is likely to raise interest rates next year which will increase demand for the Pound. Japan is likely to go through with the sales tax hike which will reduce local consumption and thereby reduce production which will inevitably reduce growth. Japan with lower prospects of growth will further reduce investor demand for the Yen.

CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

Ajay Pankhania is a part-time Technical Analyst at Accendo Markets. You can find out more about CFD Trading with Accendo Markets or download your free research trial, and get access to exclusive trading data. Follow me on Twitter (@AjayPankhania) at https://twitter.com/AjayPankhania

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