Daily analysis | 13 October 2017
Concerns over Brexit creates volatility with Sterling
The British pound traded in a rollercoaster manner yesterday, as attention turned back to the Brexit negotiations. The currency initially tumbled, after the EU’s chief negotiator Michel Barnier said that Brexit talks have reached a stalemate, without any significant progress being made. Nonetheless, sterling managed to recover all of its Barnier-related losses in the next hours, following a German newspaper report that the EU is willing to offer the UK a 2-year transitional deal to sort out the details of their future relationship, conditional upon the UK settling its divorce bill. This may have reduced the likelihood that the UK ends up with no deal at all and thus, a “hard Brexit”.
Even though the pound rebounded, these sharp moves highlight the currency’s sensitivity to Brexit affairs. Moving forward, we continue to see a highly volatile outlook for sterling. On the one hand, the currency could gain from monetary policy in the near-term, should the BoE indeed hike rates at the November gathering. That said, we think that any such gains may be relatively limited, given that one rate hike by year-end is almost fully priced in, while another one is fully factored in by September next year. This implies that for GBP to gain notably, the BoE would need to hike now and signal more than one hikes in the coming year, which is unlikely in our view. On the other hand, political uncertainty will probably remain elevated for a while, both on the domestic and the Brexit fronts. Thus, GBP may be in for a bumpy ride overall, and unless the BoE is prepared to signal more tightening than markets have already priced in, we would expect any gains in the currency to remain capped by uncertainty in the political spectrum.
GBP/USD tumbled yesterday but hit support near the crossroads of the 1.3135 (S1) level and the prior short-term downtrend line drawn from the peak of the 20th of September, and then it surged to recover all of its losses. At the time of writing, the rate appears ready to challenge the 1.3290 (R1) resistance line, where a break could initially aim for the 1.3340 (R2) barrier. Another move above that line may see scope for extensions towards the 1.3430 (R3) zone.
As for the bigger picture, although the short-term one suggests that Cable may continue trading higher for a while, we remain flat on longer-term timeframes. The pair continues to trade between the upside support line drawn from the lows of October 2016 and the long-term downtrend line taken from the peaks of July 2014.
Will a rebound in US inflation drive USD higher?
Today, we get the US CPI data for September. Both the headline and the core rates are forecast to have picked up. Indeed, the nation’s Markit services PMI supports the case for accelerating inflationary pressures, as it showed prices charged in the month rising at the quickest pace in three years. Accelerating inflation would probably be very encouraging news for FOMC policymakers, especially considering that the core rate has remained unchanged for four months now. In case inflation begins to rebound, we believe that markets could price in fully a rate hike by year-end, and may begin to price in a greater degree of tightening over the coming year. Something like that could help the dollar to recover.
EUR/USD traded lower yesterday to challenge once again the 1.1830 (S1) key barrier, as a support this time. Then, the pair rebounded somewhat. Our view remains the same as yesterday. As long as the rate is trading above that important barrier, but still below the downside resistance line drawn from the peak of the 8th of September, the short-term outlook is flat for now. A break above the aforementioned downward sloping line is needed before we get confident on decent bullish extensions, perhaps towards our next resistance of 1.1940 (R1). On the downside, we prefer to wait for a dip back below 1.1830 (S2) before we examine the case for another round of declines. Encouraging US CPIs today may prove the catalyst for such a dip.
As for the rest of today’s highlights:
Besides the US CPI data, we also get the nation’s retail sales for September. Expectations are for both the headline rate and the core rates to have risen. In any case, though, retail sales may be somewhat overshadowed by the CPIs, as these data are all released at the same time.
We have three speakers on the schedule. In Eurozone, we will hear from ECB Vice President Vitor Constancio, while in the US, both Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan will deliver remarks.
- Support: 1.3135 (S1), 1.3030 (S2), 1.2980 (S3)
- Resistance: 1.3290 (R1), 1.3340 (R2), 1.3430 (R3)
- Support: 1.1830 (S1), 1.1790 (S2), 1.1720 (S3)
- Resistance: 1.1870 (R1), 1.1940 (R2), 1.2025 (R3)
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