The pound was yesterday’s main gainer, coming under buying interest after EU Commission President Juncker said that he will do “everything to get a deal” with the UK. The next winner in line was the Swiss franc, which strengthened after the SNB kept its monetary policy on hold and refrained from providing hints with regards to additional easing.
The dollar traded lower against all but two of the other G10 currencies on Thursday and during the Asian morning Friday. It gained only versus NZD and NOK, while it underperformed the most versus GBP, CHF and SEK.
The main gainer was the British pound, which came under strong buying interest after the European Commission President Jean-Claude Juncker said that he will do “everything to get a deal” with the UK, and that he is ready to remove the Irish backstop from the withdrawal agreement, as long as alternative arrangements would be found.
Remember that one of UK PM Johnson’s demands for negotiating a deal with the EU was for the Irish backstop to be removed. Thus, Juncker’s comments added more fuel to hopes that a no-deal Brexit could eventually be averted on October 31st. That said, although the chances of such a scenario appear to have declined recently, especially after UK lawmakers passed a law that requires the government to ask for a new extension, we stick to our guns that the case is not totally off the table yet. For a new deal to be reached, the UK government would have to present a viable alternative to the backstop, and we find it hard to imagine that Johnson will come up with something that has not been already discussed and rejected in the last three years. Even in case Johnson decides to ask for a delay, consent from all 27 EU member states is needed for the extension to take flesh.
As for the pound, it could continue gaining on the reduced likelihood of a disorderly exit. However, as we get closer to the deadline, remarks and comments by themselves would not be enough to keep the currency in an uptrend. We need to see actions, namely a deal to be reached, or at least a new extension being officially approved by the EU. Anything suggesting that things could fall out of orbit again may push the pound off the cliff.
We also had a BoE policy decision yesterday, but it passed largely unnoticed. The Bank kept its monetary policy unchanged as was widely anticipated, and maintained the forward guidance that conditional upon a smooth Brexit, increases in interest rates at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target. With the Bank’s hands tied until the Brexit riddle is resolved, the pound is very likely to stay hostage to the political scene for now.
Looking at GBP/USD’s technical picture on the 4-hour chart, from around the start of September, the pair keeps on making higher highs and higher lows. From around September 5th, the rate is moving upwards within a rising channel pattern, which might continue to run for a bit more. Yesterday, we saw GBP/USD rebounding from the lower side of that channel, and it seems that the pair could continue drifting higher towards the upper bound of that pattern. This is why we will stay somewhat bullish for now.
A further push north and a break of the 1.2560 barrier could open the door to a slightly higher resistance area, at 1.2591, which marks highs of July 3rd and 4th. Given that the rate had already made a decent move higher, there is a chance to see a bit of correction back down. That said, if it is not able to slide below the 1.2560 hurdle, this could result in another leg of buying, as the bulls could try to take advantage of the lower rate and push the pair back up again. If this time the 1.2591 obstacle fails to keep the bulls down, its break may lead to a test of the 1.2631 zone, or even the 1.2658 level, marked by the low of June 27th. Around there, the rate may also test the upper side of the rising channel.
On the other hand, if the pair moves down and tests the lower side of the rising channel, the bulls might still have a chance to jump in. But if that lower bound fails to hold, its break could signal a change in the short-term trend. In order for us to get comfortable with lower areas, a rate-drop below the 1.2435 hurdle, which is yesterday’s low, would be needed. This is when the pair might slide to the 1.2391 obstacle, a break of which could clear the way to the 1.2313 zone, marked near the lows of September 10th and 11th.
The second winner in line was the Swiss franc, with traders rushing to buy it after the SNB decided to keep its policy untouched and provided no signals with regards to additional easing. Remember, yesterday we noted that following the ECB’s decision to cut its deposit rate further into the negative territory and to restart its QE program, there may have been expectations that the SNB will also cut its interest on sight deposits further into the negative territory, or at least signal willingness to do so in the coming months. The Bank just reiterated that it remains willing to intervene in the FX market as necessary, and that the franc remains highly valued. It also downgraded its GDP and inflation projections.
Moving forward, although yesterday’s decision argues for further strengthening in the Swiss franc against currencies the central banks of which have already eased their policy and remain willing to continue doing so, we prefer to adopt a neutral stance for now as due to its safe-haven status, the currency may stay more sensitive to developments affecting the broader market sentiment.
Speaking about the broader market sentiment, it remained well supported throughout the EU trading, but softened during the US session, following reports that a trade advisor to US President Trump said that the President is ready to raise tariffs to 50% or 100% if a deal with China is not imminent. Today, during the Asian session, Japan’s Nikkei 225 and China’s Shanghai Composite gained 0.16% and 0.24% respectively. Investors are likely to stay focused on developments surrounding the US-China sequel, with deputy trade negotiators resuming face-to-face talks yesterday, which will extend into today. Those talks are aimed to lay the groundwork for top-level negotiations early next month.
Back to the currencies, the Norwegian Krone was among the two losers against the greenback, despite the Norges Bank hiking rates by 25bps yesterday. The initial reaction to the decision was a spike up. However, the currency was quick to give back all its hike-related gains and trade even lower, perhaps as the hike was largely anticipated, and after the Bank said that the policy rate forecast indicates a slightly smaller rate rise than in June.
After having a good start in the first half of this week, where EUR/CHF made a strong move higher, it sold off yesterday, moving almost back to this week’s starting point. Also, looking at the 4-hour chart, we can see that the pair is forming somewhat of a rising wedge pattern. But given that we don’t have enough touches on the boundaries yet, we won’t focus on that formation too much. Instead, our focus will fall on some key areas of support and resistance. In general, given this week’s roller-coaster-like movement, we will take a neutral stand for now and wait for a clear break through one of our levels first before examining a further directional move.
If the pair reverses again and climbs back above the 1.0989 barrier, which is an intraday swing low of September 18th, this could attract more buyers again and lift the rate to the 1.1019 zone. That zone marks the high of this week. This is where EUR/CHF might stall, or even correct back down a bit. But if it continues to trade above the 1.0989 area, this could lead to another leg of buying. If this time the 1.1019 obstacle fails to withstand the bull-pressure, its break may open the door for a further move north. This is when we will target the 1.1035 hurdle, a break of which could lift EUR/CHF to the 1.1063 level, marked near the highs of July 26th and 31st. There, the rate may also test the upper bound of the aforementioned rising wedge pattern.
Alternatively, if the lower side of the wedge breaks and the rate falls below the 1.0932 hurdle, which is an intraday swing high of September 16th, this could also place the pair below all of its EMAs. This could also be seen as bearish sign, which could attract more sellers and push EUR/CHF towards the 1.0911 zone, a break of which may set the stage for a test of the 1.0885 level. That level marks the low of September 8th. Slightly lower there is another possible support area, at 1.0874, marked by the low of September 6th.
We get Canada’s retail sales for July. Headline sales are expected to have increased 0.4% mom after stagnating in June, while core sales are anticipated to have slowed to +0.2% mom from +0.9%.
We also have two Fed speakers on the agenda: New York Fed President John Williams and Boston Fed President Eric Rosengren.
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