Daily analysis | 17 October 2017
Pound falls due to lack of progress in Brexit talks
The British pound stumbled yesterday, following a report that the Brexit negotiations may be heading for a “catastrophic breakdown” unless the EU allows talks to move on to trade soon. The report added that if a transitional deal to sort out the details of the future EU-UK relationship is not outlined within this year, it may begin to lose its value as UK businesses potentially stop waiting and begin to move operations out of the UK and into the EU.
Turning to UK economics, today market participants are likely to shift their attention to the CPI for September. The forecast is for the headline rate to have ticked up, while the core rate is expected to have remained unchanged. We view the risks surrounding the core forecast as likely skewed to the upside, considering the nation’s services PMI for the month, which showed that prices charged rose at the fastest rate since April. At the time of writing, the implied probability of a BoE (Bank of England) rate hike in November is roughly 75%. A potential upside surprise in the core CPI rate could push that percentage even higher and thereby, help sterling recover a little.
Having said that, we have to reiterate our view that even though the pound could gain somewhat in the next weeks on the prospect of BoE tightening, we doubt that any such gains will be massive. A November hike is nearly fully priced in by now, while another one is fully factored in by August next year, implying the Bank will have to deliver a hike and signal more than one in 2018 for sterling to strengthen notably. Moreover, the aforementioned uncertainty in the political spectrum is another factor likely to keep a lid on any significant GBP gains moving forward.
GBP/USD continued trading lower on Monday. The latest retreat started on Friday after the rate tested the crossroads of the 1.3340 (R1) resistance and the prior upside support line drawn from the low of the 24th of August. As long as the rate continues to trade between that line and the prior downside resistance line drawn from the peak of the 20th of September, the short-term outlook is flat in our view. Having said that, if the core CPI rate ticks up as we expect, then we may get a rebound from near 1.3230 (S1), and another test near 1.3340 (R1).
As for the broader outlook, Cable continues to trade above the upside support line drawn from the low of the 7th of October, but still below the longer-term downtrend line taken from the peaks of July 2014. As such, we stick to our guns that the bigger picture is neutral as well.
USD gains as US President Donald Trump interview John Taylor.
The greenback gained yesterday, possibly on the back of news that US President Donald Trump interviewed John Taylor for the position of Fed Chair. Taylor is famous for inventing the “Taylor rule”, according to which the Federal fund’s rate should be much higher than present levels. Media reports suggest that Trump was impressed by Taylor, something that likely fueled speculation the next Fed Chair may advocate higher rates.
In addition to the Taylor speculation, another factor that pushed USD/JPY higher yesterday may have been reports of a meeting between US and North Korean diplomats, which probably triggered outflows from safe havens. Although these were later denied, the yen did not manage to recover all of the ground it lost to the greenback.
USD/JPY edged north yesterday after it hit support around 15 pips above the 111.50 (S1) line. Nevertheless, the rebound was stopped by the 112.25 (R1) resistance hurdle. Even if the rate trades somewhat higher for a while, the fact that it formed a lower low below 112.25 (R1) makes us believe that the bears may take charge again soon, and perhaps aim for another test near 111.50 (S1).
Switching to the daily chart, we see that the rate continues to trade within the wide range between 108.70 and 114.30. Thus, although the short-term picture looks somewhat negative, we remain neutral with regards to the broader outlook.
During the European morning, besides the UK CPI, we also get Germany’s ZEW survey for October. In the US, industrial production is anticipated to have risen in September, a rebound from August.
We have only one speaker on the agenda: BoC Deputy Governor Carolyn Wilkins.
- Support: 1.3230 (S1), 1.3130 (S2), 1.3030 (S3)
- Resistance: 1.3340 (R1), 1.3430 (R2), 1.3515 (R3)
- Support: 111.50 (S1), 111.00 (S2), 110.00 (S3)
- Resistance: 112.25 (R1), 112.85 (R2), 113.25 (R3)
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