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
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.
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.
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.
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.
GBP/USD Erases Gains, Drops into Negative Territory
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
Despite the recent bounce due to dollar weakness, the bias in GBP/USD
remains to the downside, given the ongoing market angst surrounding a
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.
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.
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 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.,
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."
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.
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.