After touching its lowest since October 2016 against the US dollar, the British pound rallied yesterday on news that UK lawmakers will take control of the parliamentary agenda today in an attempt to block a no-deal Brexit on October 31st. Today, they are expected to vote on whether they should force the government to seek another delay, while PM Johnson is likely to call for a vote over new elections. Elsewhere, the BoC decides on interest rates, with investors probably eager to find out whether policymakers will turn more dovish, or not.
Once again, it was mostly about the pound. The currency started Tuesday off by extending its prevailing declines, but that didn’t last for long. During the European trading, after hitting its lowest since October 2016 against the US dollar, the currency rebounded and continued sailing north throughout the rest of the day. This morning, it is found higher versus USD, CAD, JPY, EUR, NOK and SEK, while it is virtually unchanged against CHF. The currencies that managed to eke out gains against their British counterpart are AUD and NZD, which strangely gained after Australia’s GDP matched expectations of +1.4% yoy, a rate below the RBA’s latest projection for the quarter and the worst in a decade.
Needless to say, the driver behind the pound’s volatile session was once again developments surrounding the UK political scene and the Brexit sequel. The alarm to GBP-bulls’ ears was news saying that lawmakers officially submitted an application to debate on how to stop a no-deal Brexit, with the rally accelerating following the decision of a Tory MP to defect, meaning that the government had already lost its majority. Indeed, British lawmakers voted 328-301 in favor of taking control of the parliamentary agenda today, when they are expected to vote on whether they should force the government to ask the EU for another Brexit delay, until January 31st, unless a deal is found earlier.
PM Johnson said that he will now call for a snap election to be held in mid-October, but it is not certain that he will get one. Two-thirds of MPs would have to vote in favor of holding an election, while Jeremy Corbyn said that his party will vote for holding an election only if the bill over seeking a new extension is turned into law. So, the big question is not whether MPs will indeed approve the aforementioned bill, but whether it will be legally binding. Otherwise, the government may well ignore it. Even if they eventually request a new extension, a no-deal Brexit would still not be out of the equation yet. The EU will have to accept the offer, and for that to have any chance of happening, the UK will have to present a decent and firm plan on how it intends to move ahead.
Thus, with the possible outcomes still ranging from a no-deal Brexit to no Brexit at all, it’s hard to say with confidence where the pound may be headed next. It could continue gaining today if MPs indeed approve the bill with regards to an extension, but what happens next will depend on whether it will turn into law, whether we will have elections, whether this will result in a new government, and if so, whether the EU will accept any extension offer.
Yesterday, after a strong move lower, GBP/JPY was very close to testing the August low near the 126.55 area. But the pair never hit that area, as the bulls were quick to jump back in and drive the rate to the upside, managing to recover the losses made during the day. This morning we are seeing that GBP/JPY is trying to climb higher, as traders see some positive developments regarding the whole Brexit issue. From the very short-term perspective, we believe there might be a bit more upside for the pair. But let’s not forget that, overall, it is still within a downtrend, trading below a medium-term downside resistance line taken from the high of May 21st. So, the short-term move higher could be seen as a correction.
A push further north might bring the rate to the 129.30 hurdle, which is the high of September 2nd. Initially, the pair may stall around there, or even correct back down a bit. But if the bears are not feeling quite comfortable yet, the bulls won’t mind taking the steering wheel again and lifting GBP/JPY up. This time, if the 129.30 obstacle fails to withstand the bull-pressure, a break of it could set the stage for a move to the 130.05 barrier, marked near the highs of August 28th and 29th. If the buying doesn’t end there, a further push higher might carry the rate to the 130.72 level, which is the high of August 22nd.
Alternatively, in order for us to get comfortable with the downside in the short run, a drop below 126.55 would be required. This way, GBP/JPY would confirm a forthcoming lower low and it may fall to the next potential support area, at 125.91, which is the low of October 13th, 2016. If that area is just seen as a temporary obstacle on the pair’s way down, a break of it could send the rate sliding towards the 124.83 level, marked by the low of October 11th, 2016.
Following the RBA monetary policy decision yesterday, today, the central bank torch will be passed to the BoC. At their latest meeting, Canadian policymakers kept interest rates unchanged and noted that the degree of accommodation provided by the current rate remains appropriate, staying among the very few major central banks that have not turned their eyes to the cut button, although they appeared concerned with regards to the US-China trade conflict.
The last employment report disappointed, with the unemployment rate rising to 5.7% in July from 5.5% in June, and the employment change pointing to a 24.2k job loss, but inflation data for the month came in better than expected. What’s more, the annualized GDP rate for Q2 surged to 3.7% from 0.5% in Q1, exceeding estimates of a still-decent rally to +3.0%.
So, seen in isolation, the data suggests that Canadian policymakers could maintain their neutral stance for a while more, but the escalating tensions between China and the US raise doubts on that front and this is evident by Canada’s OIS (Overnight Index Swaps), according to which market participants see a 73% chance for a rate cut by the end of the year. Thus, we will dig into the statement to see how worried policymakers are with regards to the US-China sequel, and whether they have already started considering the case of a rate decrease.
Yesterday, EUR/CAD got held near its August low, at 1.4580. The pair even managed to rebound strongly back to the upside and test the 1.4655 zone, which is Monday’s high. From the very short-term perspective, there is a possibility to see the rate moving in the northern direction again, especially if it breaks above that 1.4655 zone. This may attract a few more buyers into the game, but let’s not forget that EUR/CAD is still trading below a short-term downside resistance line taken from the high of August 7th, so any move higher could be part of an upside correction. This is why we will remain cautiously bullish for now.
As mentioned above, a push through the 1.4655 barrier might clear the path to the 1.4685 hurdle, which is the low of August 27th. The rate might stall around there, or even correct back down a bit. That said, if the pair stays above the 1.4655 area, then we may see another attempt by the bulls to lift the rate higher. If they manage to push EUR/CAD above the 1.4685 obstacle, the next possible resistance zone could be around the 1.4720 mark, which is the inside swing low of August 28th, or the pair could travel further up to test the aforementioned downside line.
On the downside, we will only examine lower areas if we see a rate-drop below the 1.4580 support zone. This way, the pair would confirm a forthcoming lower low and it may slide to the next potential support area, at 1.4548, which is the low of September 26th, 2017. If the selling doesn’t stop there, a break of that area may bring EUR/CAD to the 1.4488 level, marked by the low of September 27th, 2017.
During the European day, we have the final services and composite PMIs for August from the European nations of which we got the manufacturing prints on Monday. As it is usually the case, the final prints are expected to confirm their initial estimates. The UK services PMI for the month is also coming out and the forecast points to a decline to 51.0 from 51.4 in July. That said, it is most likely to pass unnoticed as GBP-traders will keep their gaze locked on the UK political scene. Eurozone’s retail sales for July are also coming out and expectation are for a 0.6% slide after a 1.1% increase in June.
Later in the day, the US and Canadian trade data are scheduled to be released, as well as the API (American Petroleum Institute) weekly report on crude oil stock. The US trade deficit is expected to have narrowed somewhat, while Canada’s surplus is forecast to have turned into deficit. As always, no forecast is available with regards to the API report.
We also have several speakers on today’s agenda: During the European morning, Christine Lagarde will face questions from the EU Parliament with regards to her appointment as the new ECB President. Later in the day, we will get to hear from ECB Vice President Luis de Guindos, Fed Board Governor Michelle Bowman, St. Louis Fed President James Bullard, Minneapolis Fed President Neel Kashkari, and Chicago Fed President Charles Evans.
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