The pound was the main loser among the G10s, perhaps weighed on by a report that Boris Johnson will call an election in the days after Brexit if a no-confidence vote succeeds in Parliament. As for today, GBP-traders may throw a glance at the 1st estimate of the UK GDP for Q2. The Canadian dollar was among the main gainers, with CAD-traders awaiting the nation’s employment report for July.
The dollar traded lower against all but two of the other G10 currencies on Thursday and during the Asian morning Friday. It gained only against GBP and EUR in that order, while it lost the most ground versus the commodity-linked currencies NZD, AUD, and CAD.
It seems that the elevated bets that the Fed may need to ease much more than it hinted last week continued to weigh on the greenback. Indeed, equity markets kept trading in the green yesterday, as the aggressive cuts by the RBNZ, the RBI and the BOT on Wednesday may have raised more speculation on additional Fed rate cuts, but also aided by China’s better-than-expected trade data and the stabilization of the yuan.
Major EU and US indices closed well in the green, all gaining more than 1%. However, sentiment during the Asian morning today was softer, with Asian bourses trading mixed. This may have been due to headlines that the White House is delaying a decision on allowing US firms to do business with China’s Huawei. The negative headline may have been offset somewhat by the PBOC’s setting of the onshore yuan. Although it was still lower than yesterday, and apparently beyond the 7.00 per dollar mark, it was once again firmer than the market consensus.
The pound was the currency that finished last among the G10s and the driver may have been once again headlines surrounding the Brexit landscape. Overnight, the Financial Times reported that UK Prime Minister Boris Johnson will call an election if a no-confidence vote succeeds in Parliament, but the election will be held in the aftermath of Brexit. “We can’t stop them forcing an election but we control the timetable so we will force the date after October 31,” a senior government official said according to the report.
In our view, this increases fears with regards to a no-deal Brexit as it shows Johnson’s determination to pull the UK out of the EU by October 31st, even if that happens with no accord. With the EU adamant on its stance that the Withdrawal Agreement reached with Theresa May is not negotiable, and with Johnson insisting that the EU has to compromise on the Irish border backstop, we believe that the default outcome at the moment is a no-deal Brexit. Thus, we stick to our guns that the path of least resistance for the British currency remains to the downside. A clear dip by Cable below the low of August 1st, at around 1.2080, could pave the way towards the psychological round figure of 1.2000, or the 1.1980 barrier, which acted as a strong support October 7th and January 16th, 2017.
As for today , GBP traders may throw a glance at the economic agenda and the 1st estimate of the UK GDP for Q2. Expectations are for the UK economy to have stagnated after growing 0.5% qoq in Q1, which would drive the yoy rate down to +1.4% from +1.8%. If the forecasts are met, we doubt that we will see a major market reaction in the pound. After all, following the disappointing PMIs for June, investors have been prepared for a soft reading in economic growth, while the BoE itself already noted last week that it estimates a flat economic activity for the quarter. Although we remain bearish on the pound, we believe that a negative GDP rate is needed to trigger an instant and notable slide.
GBP/CHF continues to trade below its short-term tentative downside resistance line taken from the high of May 3rd. The pair is once again flirting with one of its key support areas, at 1.1788, which kept the rate from moving lower for the whole week. In addition to that, the rate failed to make higher highs this week, which suggests that there is a good chance we may see another move lower. This is why for now, we will remain cautiously-bearish and wait for a confirmation break of the above-mentioned support area before getting excited with further declines.
A price-fall below the 1.1788 hurdle, which is the low of this week (so far), would confirm a forthcoming lower low and may push the pair lower, aiming for the lowest point of 2016, which is at 1.1647. Initially, the rate might stall around there, but if the bears are still not done with it, a break of the 1.1647 hurdle could open the door to even lower zones. Our next important support area to watch will be the psychological 1.1500 mark.
On the upside, if the rate climbs above the 1.1902 barrier, marked by the high of August 7th, this might attract some new buyers, as it may increase the pair’s chances of moving a bit higher for a correction. This is when we will aim for the 1.1950 hurdle, a break of which could send GBP/CHF further up, possibly targeting the 1.2018 area, marked by the low of July 30th. The rate may get a hold-up there, or even pull back down a bit. But if it continues to trade above the 1.1900 zone, the bulls might step in and take the pair a bit higher again. If this time the 1.2018 zone struggles to keep the rate down, the next potential level that could do that may be at 1.2126, which is the high of July 31st. This is also where the pair might test the aforementioned downside line, which could help keep the rate down.
The Canadian dollar was found among the three main gainers ahead of the nation’s employment report of July, which is scheduled to be releases later today. The unemployment rate is expected to have held steady at 5.5%, while the net change in employment is forecast to show that the economy added 12.5k jobs after losing 2.2k in June.
At their latest meeting, BoC 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 yet, although they appeared concerned with regards to the US-China trade conflict. Since then, inflation for June slowed in both headline and core terms, but both rates stood at 2.0%, which is the midpoint of the BoC’s target range. What’s more, GDP for May slowed less than expected. So, combined with the aforementioned data, a decent employment report may allow BoC officials to stay distant from the cut button, even if the latest escalation in the US-China frictions raises more concerns.
After this week’s failed attempt to break its short-term downside resistance line taken from the high of May 6th, GBP/CAD reversed back down again. The pair seems to be heading towards the lowest point of July again, near the 1.5958 hurdle. If that area breaks, the rate might travel towards levels last seen in 2017. This is why for now, we will take somewhat of a bearish approach, but wait for a break of that hurdle, before examining further declines.
A drop below the 1.5958 zone would confirm a forthcoming lower low and GBP/CAD could drift further south, as more sellers might be joining in. We will then examine the 1.5839 area as our next potential support, which is the lowest point of September 2017. The rate could initially stall there for a bit, or even rebound. But if it struggles to push back above the 1.5958 hurdle, the bears may take advantage of the higher rate and pull the pair back down again. If the 1.5839 obstacle fails to withstand the bearish pressure, its break may lead GBP/CAD to the next possible support zone, at 1.5736, marked by the lowest point of 2017, reached on January 16th of that year.
Alternatively, if the aforementioned downside resistance line fails to keep the rate lower and breaks, this may raise concerns in the bear-bloc about their capabilities of pushing the pair lower. If GBP/CAD travels above the 1.6229 barrier, marked by the high of this week, this is when more buyers may start joining in and pushing the pair towards the 1.6324 zone. That zone previously was seen as good support on July 24th, but this time it might take the role of resistance, which may stall the rate for a while. This is where the pair could also meet the 200 EMA on the 4-hour chart. But if the bulls are still feeling more comfortable than the bears, a break of 1.6324 could open the door for a further rate-acceleration, potentially lifting GBP/CAD to the 1.6441 level, marked by the high of July 24th.
Norway’s CPIs for July are already out. The headline rate held steady at +1.9% yoy, instead of sliding to +1.8% as the forecast suggested, while the core print ticked down to +2.2% yoy from +2.3%, in line with market consensus. The headline rate was above the Norges Bank’s projections for the month, but the core rate remained below its respective forecast, which is at +2.4% yoy. That said, it is still above the Bank’s inflation aim of 2.0%, something that may allow Norwegian policymakers to maintain the view with regards to further rate increased later this year.
In the UK, apart from the GDP data, we also have industrial and manufacturing production for June, alongside the trade balance for the month. IP is forecast to have declined 0.2% mom after rising 1.4% in May, while MP is expected to have slid 0.1% mom after rising 1.4% as well. With regards to the nation’s trade balance, expectations are for the deficit to have widened to GBP 11.80bn from GBP 11.52bn.
From the US, we get the PPIs for July. The headline rate is expected to have remained unchanged at +1.7% yoy, while the core one if anticipated to have ticked up to +2.4% yoy from +2.3%.
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