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by Charalambos Pissouros

Risk Aversion Intensifies, GBP Rebounds After Johnson’s Brexit Offer

Global stock indices continued to slide on Wednesday and during the Asian morning Thursday, following headlines that the US will impose tariffs on USD 7.5bn worth of goods imported from the EU. Although the yen was the top-performer among the G10 currencies, the Swiss franc failed to attract haven flows, perhaps due to the lower-than-expected inflation numbers from Switzerland. In the UK, PM Boris Johnson presented his Brexit plan, deviating very little from yesterday’s rumors, something that allowed some short covering in the pound.

Equities Continue to Slide as US Announces Tariffs on EU Goods

The dollar traded mixed against the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained against CAD, CHF and slightly against SEK, while it underperformed versus JPY, NZD, EUR, and GBP in that order. The greenback traded virtually unchanged against AUD and NOK.

USD performance G10 currencies

Although not so clear by the overall performance in the FX sphere, the strengthening of the yen suggests another round of risk aversion. Indeed, major global equity indices continued tumbling yesterday, with the negative sentiment rolling into the Asian morning today.

Already feeling the heat of the disappointing US ISM manufacturing print, investors got another reason to abandon equities, and this was headlines that the US will impose tariffs on USD 7.5bn worth of goods imported from the EU. Specifically, the US said it would proceed with 10% tariffs on EU-made Airbus planes and 25% on French wine, Scotch and Irish whiskies, and cheese from across the continent. The new tariffs were seen as a retaliatory move against illegal EU aircraft subsidies and were also approved by the WTO.

Following the disappointment in the Eurozone PMIs, the bloc’s soft inflation prints, and the slide in the US ISM manufacturing index for September, the new trade war front raises more concerns with regards to the economic performance in the Euro area and the US, and may have prompted market participants to add to their bets with regards to additional stimulus measures by the ECB and the Fed. According to Eurozone’s money markets, another 10bps cut in the ECB’s deposit rate is now more-than-fully priced in for March 2020, while according to the Fed funds futures, the probability for third cut by the Fed to be delivered at the upcoming meeting has spiked to 75.4% from 63% yesterday morning.

Back to the currencies, the Swiss franc failed to attract haven flows this time, perhaps as the currency felt the heat of the lower-than-expected inflation numbers from Switzerland. On a mom basis, Swiss inflation slid 0.1% instead of rising by the same percentage as the forecast suggested, driving the yoy rate down to +0.1% from +0.3%. At its prior gathering, the SNB kept its monetary policy untouched and provided no signals with regards to additional easing, a decision that may have disappointed those who, following the ECB’s decision to add more stimulus, have been expecting the SNB to also cut interest rates, or at least signal willingness to do in the months to come. The Bank just reiterated that it remains willing to intervene in the FX market as necessary, and that the franc remains highly valued. That said, yesterday’s soft inflation data may have revived some speculation that Swiss policymakers will eventually have to loosen further their policy.

The Canadian dollar was the main loser as, apart from the headlines surrounding tariffs on EU goods, it may have also been weighed down by the larger than expected crude oil inventory build. According to the EIA (Energy Information Administration) weekly report, US inventories rose 3.100mn barrels last week, more than the 1.567mn forecast. This came in contrast with the API (American Petroleum Institute) report, released on Tuesday, which showed a 5.920mn barrels slide, thereby surprising oil and Loonie traders. Both WTI and Brent slid 2.09% and 2.31% respectively.

USD/JPY – Technical Outlook

From around the beginning of September, USD/JPY continues to move sideways, roughly between the 107.00 and 108.48 levels. After hitting the upper bound on October 1st, the pair reversed sharply to the downside and this morning it tested the lower side of the range, at around 107.00. Given that the rate continues to trade within the range, we will take a neutral stance for now, but bearing in mind that the pair is flirting with the lower bound of it, we see more chances for a downside exit rather than an upside one. That said, we will wait for a break of 107.00 level, before getting comfortable with further declines.

If we eventually see the above-discussed break, this would confirm a forthcoming lower low and the pair might drift further down, as more sellers could be joining into the game. We will then examine the 106.62 hurdle as the next potential support, a break of which may lead USD/JPY to the 106.40 level, marked by the high of September 2nd. The rate could initially stall around there, or even rebound slightly. But as long as it stays below the 107.00 territory, we will continue looking south. Another slide could bring the pair back to the 106.40 obstacle, which if broken might send USD/JPY to the next potential support zone, at 106.12 level, marked by an intraday swing low of September 4th.

Alternatively, if USD/JPY pushes back up and travels above the 107.43 barrier, marked by the low of September 26th, we could start examining some recovery inside the range. This way, the rate would also get back above its 200 EMA on the 4-hour chart. We could then aim for the 107.90 zone, which is yesterday’s high, a break of which may set the stage for another push up, towards the 108.20 level. That level marks the high of September 27th

USD/JPY 4-hour chart technical analysis

GBP Up on Short-Covering After Johnson’s Brexit Plan

Passing the ball to the pound, the British currency was found slightly higher against its US counterpart this morning. This may have been due to some short covering after UK PM Boris Johnson presented little new information in his Brexit proposal during his closing speech at the Conservative annual conference. With regards to the Irish backstop, he proposed an all-island regulatory zone in order to cover all traded goods, with Northern Ireland institutions having the option to exit the zone. This is not a major deviation to earlier rumors that he may propose Northern Ireland staying in the single market for four additional years, and that’s why the pound’s recovery could be seen as a “buy the fact” response.

EU Commission President Jean Claude Junker responded by saying that there are “positive advances” in the proposal, but added that there are still some problematic points, while Irish PM Minister Varadkar noted that the offer does not fully meet agreed objectives. These comments add to the case that Johnson’s plan may not be accepted by the EU and bring us back to square one.

As for our view, it remains the same as yesterday. With Johnson staying adamant that he will pursue an October 31st Brexit, with or without a deal, the risk of a disorderly exit in less than a month’s time remains well on the table, despite Parliament passing a law that requires him to ask for a new extension. Even if he eventually decides to do so, for a new delay to take flesh consent from all EU members is needed, something that is far from a given. Thus, we stick to our guns that with the clock ticking towards the current deadline, the pound may turn and drift south again, unless the two sides manage to find consensus, either by agreeing on a middle-ground deal, or by agreeing to a new Brexit extension.

GBP/USD – Technical Outlook

After a strong slide on October 1st, GBP/USD found some support just fractionally above the 1.2200 hurdle and reversed sharply to the upside. Yesterday, the pair had another round of volatile swings, where initially it slid, but the bulls were quick to recover the losses. At the time of writing, the rate is close to its short-term downside resistance line taken from the high of September 20th. Although the pair is still below that downside line, we will stay neutral for now, as GBP/USD failed to form a lower low during yesterday’s initial decline and is now closer again to the 200 EMA on the 4-hour chart.

In order for us to get comfortable with lower areas, a rate-drop below the 1.2204 hurdle is required. That hurdle is the current low of this week and if it gets broken, this would confirm a forthcoming lower low and more bears might be joining in and driving the pair towards the 1.2165 obstacle, a break of which could be setting the stage for even lower areas. This is when we could start examining the 1.2110 level, marked near the lows August 21st and 22nd.

On the upside, we will only start looking north, if we see a break of the aforementioned downside line and a push above the 1.2346 barrier, marked by the high September 30th. Such a move would place the rate above its 200 EMA on the 4-hour chart and more buyers could join in in order to lift GBP/USD higher. This is when we will aim for the 1.2380 hurdle, a break of which could send the pair to the 1.2413 zone, which marks the lows of September 23rd and 24th. The rate may stall around there for a bit, or even correct back down slightly. But if it struggles to move below the 1.2346 hurdle, this could attract the buyers again and we may see GBP/USD rising towards the above-mentioned 1.2413 barrier, where a break might lead the pair to the 1.2458 level. That levels is the inside swing low of September 20th.

GBP/USD 4-hour chart technical analysis

As for the Rest of Today’s Events

From the UK, we get services PMI for September, which is expected to have slid to 50.3 from 50.6. However, following the miss in both the manufacturing and construction indices, we see the risks surrounding the services index as tilted somewhat to the downside. In any case, we repeat that we don’t expect the UK PMIs to be a game changer for the pound. We still expect the currency to stay hostage to developments surrounding the Brexit landscape.

In the US, we get the final Markit Services and Composite PMIs for September, which are expected to have risen somewhat, as well as the ISM non-manufacturing index, which is forecast to have declined to 55.0 from 56.4. Following the tumble in the ISM manufacturing print, all eyes will fall on the ISM non-manufacturing number, where another disappointment is likely to add to concerns with regards to a steep slowdown in the US economy and thereby intensify further the risk-averse market environment. Initial jobless claims for last week are also coming out and the forecast suggests a small increase to 215k from 213k.

As for the speakers, we have five on today’s agenda: ECB Vice President Luis de Guindos, Chicago Fed President Charles Evans, Cleveland Fed President Loretta Mester, Fed Board Governor Randal Quarles, and BoE MPC Member Silvana Tenreyro.

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