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#1141

GBP/USD Weekly Forecast January 9-13


GPB/USD gained ground on Wednesday and Thursday in last week’s trading, reversing losses that were produced earlier in the week. However, the pair failed to sustain the upside momentum and turned lower on Friday, as the dollar rallied ahead of and following the release of the December U.S. employment data. GBP/USD ended the day at 1.2282, down 0.52% for the week overall.

The U.S. employment report indicated that U.S. job growth is slowing, while wages are rising. There was a notable increase in average hourly earnings growth, year-over-year. At 2.9%, this is the highest rate since May 2009. This should benefit consumer spending, and will also work to spark expectations for higher inflation. This, in turn, could increase the pace of interest rate increases in 2017, a factor that should help the dollar and, in turn, put pressure on GBP/USD.

Sterling struggled to sustain a gain last week despite the latest U.K. PMI report indicating improvement in the manufacturing sector. Last week, the Markit UK PMI manufacturing index strengthened to 56.1 for December from a revised figure of 53.6 in November, which was originally reported as 53.4. This was the highest reading for 30 months and well above consensus forecasts of a slight decline to 53.3. It appears sterling continues to struggle due to investors’ nervousness regarding Brexit.

Today, British Prime Minister Theresa May held an interview with Sky New, her first interview in 2017. Although May has revealed little about her strategy of pulling out of the European Union, comments made on Sunday in the interview suggest that exit negotiations will be extremely painful, according to a report from CNN Money. These comments could put continued pressure on sterling in Monday’s trading.


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#1142

UK - BRC like-for-like sales for December: +1.0% y/y (prior +0.6%)


Data from the British Retail Consortium

Like for like sales up 1% in December from a previous up 0.6%

Comments from BRC chief executive Helen Dickinson on the data:

  • "Despite the slow start to the Christmas trading period, the week itself was a bumper one and exceeded expectations"
  • "The challenge for retailers in 2017 will be to create real growth against a backdrop of growing inflationary pressures and persisting economic and political uncertainty"
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#1143

GBP: Market Not Re-Engaged In Selling But Short Remains Actionable


The UK's High Court decision on November 3 took some pressure off the British Pound. But Prime Minister May's speech on Sunday (8 Jan), which simply restated her plan to trigger Article 50 by March and leave the EU within two years, has been sufficient to pull the currency down to the October lows.

Cable moved from 1.229 on Friday's close to 1.216 today. This is a testament to how vulnerable the Pound is to the repricing of a ‘hard Brexit’ scenario, as well as, in our view, the extent to which periods of Sterling strength are the result of markets not discounting the new reality appropriately, a reality that we have fully incorporated into our outlook for the currency since the referendum in June and that we have reiterated several times since.

The FX market has not yet re-engaged with selling Sterling. Net shorts have been reduced (Exhibit 2) and GBP has been one of the few G10 currencies not to depreciate substantially against the Dollar since the US elections.

But, in our view, Sterling is ‘actionable’ and soon set to become even more ‘unfashionable’, despite the recent move lower, as coming political events will only increase uncertainty on the future relationship between the UK and the EU. The Supreme Court is due to rule in favour of the High Court Decision on the need for a Parliamentary vote to trigger Article 50 by the end of the month. In response, the government will need to prepare a bill for the vote to take place before the end of March. This preparatory work, together with a subsequent parliamentary vote in favour of triggering Article 50, is likely to increase uncertainty even further. The kind of deal the EU and the UK will agree on will remain unclear for some time, with the UK government sticking to PM May's 'red lines' (immigration control and backing away from the European Court of Justice's jurisdiction) and the EU refusing to grant the UK participation in the Single Market under these demands. We expect the main economic consequences to be twofold: (i) an economic slowdown owing to elevated political uncertainty that reduces investment, employment and consumption as a result of higher prices, and (ii) an adjustment to the UK's external balance requiring a substantial decline in the current account deficit.


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#1144

UK ministers see the government losing the Supreme Court case


Headline coming from the UK paper The Guardian

  • Ministers have privately conceded they are likely to lose case
  • Senior gov officials think 7/11 judges will uphold prior decision on MP's deciding on art50
  • More than one bill may have been prepared to so the gov can respond to the guidance from judges quickly

Full story from the Guardian here.

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#1145

GBP/USD Erases Gains, Drops into Negative Territory


GBP/USD has come under selling pressure and is now well off the session high, trading near 1.2208, down 0.01%. Earlier today, the pair was trading at 1.2258, a gain of 0.41%, after reaching as high as 1.2317.

It has been reported that British Prime Minister May will make a speech next Tuesday on her approach to Brexit to promote global Britain. This news may have sent some jitters through the market.

On the downside, support is at the zone defined by the 1.21 level and the October 7th flash crash low at 1.1950. This zone was tested with Wednesday’s low.

Despite the recent bounce due to dollar weakness, the bias in GBP/USD remains to the downside, given the ongoing market angst surrounding a hard Brexit.

On the upside, resistance is at the January 5/6 highs at the 1.2432 level. At present, this level is expected to remain intact given today’s failed rally attempt.

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#1146

The Bank of England have release their Q4 credit conditions report

  • Significant reduction in capital investment and commercial real estate led to main changes in corporate lending demand
  • Large company demand for bank borrowing unchanged in Q4 vs big fall in Q3
  • Saw a significant drop in demand for borrowing by SME's, expecting another fall for small firms in Q1
  • Demand for buy to let mortgage lending increased significantly in Q4, expected to fall in Q1
  • Banks are expecting the availability of unsecured household credit to decrease slightly in Q1
  • Banks predict a slight increase in availability to mortgage lending in Q1
  • Default rates on secured household lending fell in Q4 

It's no real surprise to see investment falling with Brexit hanging over the UK like a storm cloud.

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#1147

GBP/USD forecast for the week of January 16, 2017


During the past week, the British pound initially started off by a selling off drastically. We reach towards the 1.20 level, which has been massive support as of late, and then bounced enough to form a hammer. The hammer is a very bullish sign, and thus I suspect that the buyers are going to be getting involved. However, this is going to be a very choppy market going forward, as we could be looking at a potential trend change. If that’s the case, expect a lot of volatility and don’t get involved unless of course you can deal with quite a bit of volatility. A break above the top of the hammer is a sign that the buyers are getting involved, and a break above the 1.2750 level sends this market much higher. The 1.20 level is a major level in this pair, so if we break down below their things change drastically.

However, I believe that the British pound selling off is only going to be a temporary thing. When I look at a multi-year chart, there is a massive floor at the 1.15 handle as well as the 1.20 level, so I think it’s only a matter of time before value investors get involved. The Federal Reserve is looking to raise interest rates true enough, but the question remains whether they can. Trend changes are very volatile and nasty looking things, and that’s probably which are going to see in this pair. There was a point where the swap alone would be reason enough to hang onto this type of trade but unfortunately most retail shops are going to pay you either know swap, or a slightly negative one.

However, I think if you are a longer-term player you can take a shot on the street, but you must be able to deal with a significant drop if we do break down below the 1.20 level. This is a multitier trade waiting to happen, but I don’t know quite yet if were ready. There are a couple signs on this chart though, one of which is the MACD picking up some positivity at the same time we have formed what could be a “double bottom.” I’m keeping my eyes open, and putting a small long position on.


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#1148

British Pound Plunges to Fresh Lows as May Signals Diamond-Hard-Brexit


The Pound was smacked down to a new multi-year lows against the Dollar and other major currencies as Pacific markets opened on Monday 16 January. 

The decline was expected. 

This weekend we were met with reports from the Sunday Times that Theresa May will make the right to control UK immigration a red line in upcoming Brexit negotiations.

This clashes with the EU's own red line that free movement of labour is a prerequisite for membership to the EU's single market - and the question of single market access granted to the UK following Brexit is what is driving the Pound at present.

According to a report, the UK government's red lines will be an end to free movement from the EU and the right to hold bilateral trade talks with other countries, which it is thought will not be achievable while still in the single market.

Markets now have certainty - the UK is leaving the EU's single market.

While the Prime Minister is intending to attempt to make a positive persuasive case for the UK leaving a spokesman suggesting that "we are expecting a market correction" underlines the presumption within government of the currency trading fresh lows this week.

"When May encouraged GBP negativity back in October she failed to recognise or attempt to mitigate the impact of the slide, expect much the same this time, indeed expect an attempt to make a virtue of the move via benefits to the export sector," says Jeremy Stretch at CIBC Macro Strategy in London.

The job for currency markets now is to find the right price for Sterling to reflect the move.

"Early indications suggest single market access is unlikely to be retained - a headline which could send GBP sharply lower," says Viraj Patel at ING in London.

"Hard-Brexit fears plus weaker UK data points to a test of the 1.20 level. Range next week: 1.1840-1.2320, 1 month target: 1.15," says Patel.

Patel wrote this prior to the admission that the UK would be setting red lines on migration; they may have to recalibrate.

For analyst David Bloom at HSBC we are now in what can be defined as “diamond-hard-Brexit” - one in which the UK would completely sever all links with the continent, including the common market, the EU budget and free movement of labour.,

HSBC say GBP/USD would likely trade at 1.10 on this diamond-hard-Brexit scenario.

The sooner we reach this level then the sooner the recovery can begin.

Note though that downing Street has described the suggestion that the UK is looking to pull out of the single market as "speculation" with a source telling Sky News: "The issue of the single market and the customs union will be answered on Tuesday when the Prime Minister sets out her negotiations."

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#1149

GBP/USD Surges in Reaction to May Speech


Sterling is on track for its best day since the financial crisis in reaction to the Brexit speech delivered today by British Prime Minister Theresa May. The pair is currently trading near 1.2330, up nearly 2.4%.

Britain will leave the EU single market and the Prime Minister promised a parliamentary vote on Britain’s deal to leave the European Union and said it would seek to stay a key European partner. May also stated that she is confident that a positive agreement can be reached with the EU and that she does not want to undermine the single market or the European Union.

GBP/USD is now above the $1.2300 level and appears on track for a retest of the high established January 5th at 1.2432, as the pair has broken solidly above the 61.8% retracement level of the decline from that high to Monday’s reaction low.

The steep trajectory of today’s rally has left little in the way of clear support on the chart should sellers step back in due to the pair’s now extreme overbought condition on both a daily and intraday basis. Minor potential support stands at the 1.2117 level, followed by 1.2085.


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#1150

GBP/USD Faces Profit-Taking Following Tuesday’s Explosive Advance


Sterling is subject to profit-taking in today’s session following Tuesday’s gain of about 3%, the largest one-day gain since at least 1998. GBP/USD breached the 1.2400 level, with a move to 1.2416 for a high, which represents a test of the corrective top established January 5/6 as well as a test of the pair’s 50-day moving average. In today’s trading, the pair has backed off from Tuesday’s high and is trading at the 1.2309 level, down 0.85% from Tuesday’s North American close.

Sterling was higher in yesterday’s trading ahead of U.K. CPI data and the rally was boosted by the stronger-than-expected numbers. UK consumer prices rose 0.5% in December with the year-over-year rate increasing to 1.6% from 1.2% previously. This was better than estimates for a rate of 1.4% and represents the highest annual inflation rate since July 2014. The core inflation rate also increased to 1.6% from 1.4% compared with forecasts of an unchanged reading at 1.4% The RPI inflation rate came in at 2.5%, up from 2.2% previously.

The advance in GBP/USD then accelerated further as British Prime Minister Theresa May gave her highly anticipated Brexit strategy speech. May confirmed that she planned to take Britain out of the European Union’s single market, but included promises to let parliament have a say on the Brexit deal. May also stated that she is confident that a positive agreement can be reached with the EU and that she does not want to undermine the single market or the European Union.


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#1151

UK data: RICS House Price balance (December): 24% (expected 30%)


House prices on the up in the UK still, but at a, slower rate the previous month.

December result 24%
  • expected 30%
  • prior 29%, revised from 30%
The dip is the first for 5 months
  • Surveyors saying sales weaker
  • London values fall, other areas higher though
--
The Royal Institution of Chartered Surveyors (RICS) House Price Balance measures the percentage of surveyors reporting a house price increase in their designated area. A level above 0.0% indicates more surveyors reported a rise in prices; below indicates more reported a fall.    
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#1152

UK December Retail Sales Slide 1.9%, Prices Edge Higher


UK retail sales volumes fell sharply in December with a decline of 1.9% for December, which dragged the annual increase down to 4.3% from 5.9% previously as the November increase was revised to show a 0.1% decline from the original 0.2% gain. The data was sharply weaker than consensus forecasts of a 0.1% fall for the month and the weakest monthly figure since April 2012.

Excluding fuel sales, there was a 2.0% decline for the month with the annual increase at 4.9%.
On a 3-month basis, sales rose 1.2% with a 5.6% annual increase.

Sales were weak across most sectors, although the biggest decline was in non-food stores with sales of household goods declining 7.3%. Clothing sales also fell 3.7%, while food sales were broadly resilient.

The monthly data is always erratic and there are huge seasonal adjustment issues for December given the impact of Christmas sales. The data will, however, tend to reinforce expectations that there will be an underlying slowdown in sales growth from unsustainable levels as the growth in real incomes slows.


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#1153

British Pound Clings to ’Flash Crash’ Range Ahead of UK/US GDP Report


Fundamental Forecast for the British Pound: Neutral

    GBP/USD may continue to face range-bound conditions ahead of the ‘Brexit’ deadline as Prime Minister Theresa May pushes for a clean break from the European Union (EU), but the bearish sentiment surrounding the British Pound may subside over the near-term as the Bank of England (BoE) changes its tune for monetary policy.

    Even though the BoE looks poised to retain the highly accommodative policy for the foreseeable future, the recent uptick in the U.K. Consumer Price Index (CPI) may sway central bank officials to adopt a more hawkish tone at the next ‘Super Thursday’ event on February 2, and Governor Mark Carney may show a greater willingness to gradually move away from the easing-cycle as he anticipates a ‘notable’ increase in inflation. With that said, market participants may pay close attention to Governor Carney next week as the central bank head is scheduled to speak at the G20 conference in Wiesbaden, Germany, but more of the same rhetoric may keep GBP/USD within the current range as the Monetary Policy Committee (MPC) warns ‘policy can respond, in either direction, to changes to the economic outlook as they unfold to ensure a sustainable return of inflation to the 2% target.’

    Looking at the economic docket for the week ahead, the 4Q Gross Domestic Product (GDP) reports coming out of the U.K. & U.S. may generate a buzz as both regions are projected to grow at a slower pace compared to the previous quarter, but the backward-looking data prints may do little to alter the range-bound conditions in the pound-dollar exchange rate amid the diverging paths for monetary policy. Fed Fund Futures are now pricing a greater than 70% probability for a June rate-hike as Chair Janet Yellen argues the Federal Open Market Committee (FOMC) is ‘closing in’ on its dual mandate, and the pickup in interest-rate expectations continues to foster a long-term bearish forecast for GBP/USD as the central bank remains on course for further normalize monetary policy in 2017.


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    #1154

    GBP/USD forecast for the week of January 23, 2017


    The British pound bounced off of the 1.20 level underneath to form a very strong looking candle, engulfing the hammer from the previous week. If we can break above the 1.25 level above, I believe that the market will continue to go higher. In the meantime though, it’s probably easier to deal with this market from a shorter-term perspective rather than the weekly chart. If we breakdown below the 1.20 level, that would be catastrophic. Regardless, I think you can count on seen quite a bit of volatility in this market.


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    #1155

    GBP/USD Weekly Forecast January 23-27


    Last week was a quite a ride for GBP/USD. The week kicked off in Asia with a rare event in the FX market – a gap to the downside. The sharp drop lower in GBP/USD was sparked by reports last weekend indicating that during the planned speech by British Prime Minister Theresa May, which took place January 17th, she would lay out plans for a “hard” Brexit and that she was willing to quit the European Union’s single market to regain control of Britain’s borders. The news resulted in sharply lower open in Asian trading Monday and a test of the October 7th “flash crash” low at 1.1905, with GBP/USD falling to 1.1986 for a low.

    However, fears were eased when May took to the podium last Tuesday, as the Prime Minister stated Britain will leave the EU single market and promised a parliamentary vote on Britain’s deal to leave the European Union and said it would seek to stay a key European partner. May also stated that she is confident that a positive agreement can be reached with the EU and that she does not want to undermine the single market or the European Union.

    This was perceived as positive for sterling, which was already trading above Monday’s levels ahead of May’s speech. The move to the upside in GBP/USD accelerated on May’s comments, with the pair rising approximately 3%, the largest climb ever in the dealing data – which goes back to 1998 – according to a report from Thomson Reuters. Sterling also gained more than 2 percent against the euro, with dealers reporting a widespread squeeze on short positions taken in derivatives markets.

    Tuesday’s advance lifted GBP/USD to test the highs established on January 5/6 at 1.2430/1.2433 and price action has been capped at that level since.

    On Wednesday, GBP/USD pulled back in reaction to the extreme overbought condition that resulted from Tuesday’s massive rally. Support was found at 1.2254 and that level provided a floor for the pair on both Thursday and Friday.


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