Evidence consumer-price gains are cooling raises the prospect the central bank will follow up on its May interest-rate cut to support flagging growth. Technical indicators also suggest the peso may struggle to extend gains, with the currency approaching resistance levels based on Fibonacci analysis.
The peso has strengthened more than 6% from a 13-year low set in October, with gains fueled by the central bank raising its benchmark rate by a combined 175 basis points to 4.75% in November. The currency touched a 16-month high in June after Bangko Sentral ng Pilipinas defied predictions for a second rate cut by maintaining a “prudent pause” at its June 20 meeting.
The pause will allow policymakers to “observe and assess” the impact of May’s easing, as well as phased reductions in the central bank’s reserve requirement ratio, central bank Governor Benjamin Diokno said at the meeting.
The decision to keep policy on hold came after data showed inflation unexpectedly quickened for the first time in eight months in May. If economists are right about June’s data, the uptick was only transitory. Friday’s report will show inflation slowed to 2.8% in June from 3.2%, according to economists’ forecasts, staying in the central bank’s 2% to 4% target range.
Consumer prices probably rose 2.2%-3% in June from a year earlier, the central bank said Friday. Lower rice and domestic oil prices, a downward adjustment in electricity rates and recent peso strength kept inflation in check, it said.
Still, even if price pressures ease, there is no guarantee policymakers will decide to cut rates again – which means further peso gains are not out of the question.
Technical signals
Technical indicators are suggesting any further downside in the dollar-peso currency pair will be limited. The exchange rate is approaching Fibonacci support at 51.139, the 23.5% retracement of its rally from 2013 to 2018. Additional support can be found around 51.00, a long-term bull trendline.
Slow stochastics, a momentum indicator, are also in oversold territory, suggesting the decline could slow, at least in the short term.