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by Charalambos Pissouros

Sterling Opens Monday Up, but Tumbles Following Boris Johnson’s Resignation

Brexit 02

GBP Tumbles After Foreign Secretary Boris Johnson Steps Down

The pound traded lower against all but two of the other G10 currencies on Monday. It managed to gain only against JPY, while it traded virtually unchanged versus CHF. The main gainers against the British currency were AUD, NZD and USD in that order.

GBP perf 100718

Monday was all about the pound and Brexit. The British currency opened the day with a positive gap on news that on Friday, UK PM Theresa May agreed with her cabinet on the UK’s trade relationship with the EU after Brexit. According to the Prime Minister, the proposal will create a UK - EU free trade area which establishes a common rule book for industrial goods and agricultural products.

That said, a couple of hours after the opening, the currency got a small hit by rumors that Brexit minister David Davis reported to have resigned, something that was confirmed later in the day. Davis said that May’s plan would make it difficult for Britain to disagree with EU rules, while he described the common rulebook on goods as “problematic”. “It seems to me we’re giving too much away, too easily, and that’s a dangerous strategy,” he said. However, he added that May is a good Prime Minister and that he will not encourage a challenge against her. His last comments prompted investors to buy again the pound, perhaps on speculation that May’s leadership is not in danger and that Davis’ resignation increases the chances for a “soft Brexit”.

The pound’s story does not end here though. Later in the day, hours after Davis decided to step down, Foreign Secretary Boris Jonson announced his departure as well. The pound came under massive selling interest on this round of news, probably on fears of more resignations and fresh concerns over May’s leadership. The final act was a small rebound, following headlines that the Conservative party may not call for a confidence vote against May, with Jacob Rees-Mogg, a Conservative MP, saying that he has not submitted a letter calling for May’s resignation. However, the rebound was able to reverse only a portion of the Johnson-related tumble.

The Conservatives currently have 316 members in Parliament and only a 15% of them (48 members) is needed to submit a letter before a leadership challenge can be triggered. If this happens, then all Conservative MPs will be able to vote for or against May.

In our view, things around Brexit are getting more and more complicated, with Theresa May trapped between a rock and a hard place. Even if she avoids a leadership challenge, her free-trade-area plan will still have to be accepted by the EU, something that appears to be a hard task. With May insisting on ending free movement of EU citizens, EU officials may see the plan as “cherry picking” and reject it.

As for today, investors are likely to stay on guard for any fresh headlines around Brexit, but as they try to assess the likelihood for a BoE hike in August, they may also pay some attention to the economic calendar.

The ONS releases its first monthly GDP, which will be for the month of May, while the NIESR publishes its GDP estimate for the three months to June. No forecast is currently available for the ONS print, while the NIESR model is anticipated to show that the UK economy accelerated to +0.3% from +0.2% in the three months to May. At their latest policy meeting, BoE policymakers noted that the data released since the May meeting were consistent with their view that the slowdown in Q1 was temporary and they expected a +0.4% GDP growth in Q2. Thus, investors are likely to pay extra attention to the NIESR estimate in order to see whether BoE officials were right or wrong.

We also get industrial and manufacturing production data for May. Expectations are for industrial production to have risen 0.5% mom after falling 0.8% in April, something that would drive the yoy rate up to +1.9% from +1.8%. Manufacturing production is forecast to have rebounded as well, to +1.0% mom from -1.4%, which would push the yoy manufacturing rate up to +2.0% from +1.4%. The case for higher yoy rates is supported by the manufacturing PMI for the month, which rose to 54.3 from 53.9 in April. The UK trade balance for the same month is coming out as well.

UK IPvsPMI 100718

GBP/AUD – Technical Outlook

The British Pound tumbled yesterday against most of its major counterparts after Foreign Secretary Boris Johnson resigned.  GBP/AUD felt the heat as well and moved lower. The move pushed the pair out of the range, between 1.7735 and 1.7980, that it was trading within, which now raises concerns over the Pound’s strengthening capabilities. For the short run, we will take a cautiously-bearish stand and aim for lower levels.

Currently, the bulls are trying to get a bit of their lost grounds back by pushing GBP/AUD towards the lower side of the range that it broke yesterday. A reversal back down from the 1.7735 zone could open the path towards the next key area of support at 1.7625, a break of which could mean that GBP/AUD has been shaken now and we could see further declines. It is good to keep 1.7530, marked by the low of 12th of June, on our radar as the next potential area of support.

Our oscillators, the RSI and the MACD, are looking quite negative at the moment. The RSI is below zero and near the 20 zone. The MACD is below both the trigger and zero lines, which adds more negativity to the near-term outlook.

Alternatively, if the bulls decide to fight back in full and break the 1.7800 area, this will turn the outlook back to flat, as the rate may continue to recover within the aforementioned range. If the 1.7800 area is broken, the pair could continue climbing higher to the 1.7880 hurdle, a break of which could open the path towards the 1.7950 or even 1.7980, which is the upper side of the range.

2018.07.10 GBPAUD 240 Logo

EUR/GBP – Technical Outlook

Yesterday’s Brexit events also had their effect on EUR/GBP. The pair spiked higher, breaking the 0.8860 resistance line and positioning itself for another potential move up. Overall, EUR/GBP is still within the falling channel, which started around the 27th of September last year and remains intact till the present day. That said, it looks like the bulls are confident to try and reach the upper bound of that channel in order to see if they could give another push to break out of the channel. This move higher is also supported by the upside line, taken from the low of the 17th of April.

For now, we remain positive on the short-term outlook for EUR/GBP, as it could eventually push towards the 0.8900 level, marked by yesterday’s peak. Slightly above that is the upper bound of the falling channel, which could stall the rally for a bit, until the bulls and the bears decide who will take control from there.

The RSI and the MACD are also in support of the upside. The first is above 50 and is slightly tilted to the upside. The second is above zero and its trigger line. This makes us believe that there is good chance for the pair to make its way higher, as both indicators are detecting upside momentum.

On the downside, a move back below the 0.8860 level could put a bit of pressure on EUR/GBP, which could lead to a decline towards another good area of support at around 0.8828. If, at this point, the bears become the main driver force behind the pair, we could see it sliding to the 0.8800 zone, marked by the lows seen on the 4th of July. Slightly below that lies the 0.8780 hurdle, marked by the low of the 25th of June.

2018.07.10 EURGBP 240 Logo

As for the Rest of Today’s Events

Apart from the UK data, we have Norway’s CPIs for June. Expectations are for the headline rate to have risen to +2.4% yoy from +2.3%, while the core rate is forecast to have ticked down to +1.1% yoy from +1.2%. At its latest meeting, the Norges Bank kept interest rates unchanged as was widely expected, while in the statement accompanying the decision, it was noted that “the key policy rate will most likely be raised in September 2018”, a much clearer line compared to the “after summer” that was included in the previous statement.

Even if the core rate ticks down to +1.1% yoy, this would still be in line with the Bank’s forecasts and is unlikely to affect much market expectations with regards to the prospect of a September hike. However, in order to better examine whether the Bank will stick to that view at its upcoming gathering – set for the 16th of August – we would like to wait for the July CPIs, as this will be the inflation data set officials will have to work with at that meeting.

In Germany, we have the ZEW survey for July. Expectations are for the current conditions index to have slid to 78.0 from 80.6, while the expectations index is forecast to have declined further into negative territory. Specifically, the index is anticipated to have declined to -17.9 from -16.1.

In the US, JOLTs job openings for May are coming out, while from Canada, we get building permits for May and housing starts for June.

As for the speakers, we have two on the agenda: ECB Executive Board member Sabine Lautenschläger and ECB Supervisory Board member Ignazio Angeloni.



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