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by Charalambos Pissouros

Tories Win the UK Elections, US and China Agree on “Phase One” Deal

The pound skyrocketed overnight, outperforming all the other G10 currencies, after the UK election exit polls suggested that the Conservatives will get an 86-seat majority in Parliament. Elsewhere, equities rallied and safe havens slid on news that the US and China have reached a “deal in principal” over trade. We also had an ECB policy meeting yesterday, with the new President, Christine Lagarde, saying that there are some stabilization signs in growth slowdown.

GBP Rallies as Conservatives Gain Parliament Majority

The pound rallied against all of the other G10 currencies on Thursday and during the Asian morning Friday. It gained the most against JPY, CHF and CAD, while it eked out the least gains versus NOK, AUD and NZD.

GBP performance G10 currencies

Yesterday, it was all about the UK elections. The pound has been in an uptrend mode ahead of the election day as opinion polls have been pointing to a Tory majority in Parliament. That’s why yesterday we noted that if this is the case, the pound could gain but not much as this was largely expected. The Conservatives secured a victory, but the pound skyrocketed, with Cable gaining around 400 pips. The rally came after exit polls suggested that Johnsons will get an 86-seat parliamentary majority, the largest for the history of his party since Margaret Thatcher’s victory in the 80s.

GBP-bulls may have gotten more excited than we have anticipated, perhaps as just ahead of the voting there was some nervousness after a Tuesday poll suggested that the lead of the Tories is narrowing. In any case, Johnson’s victory now opens the door for ratifying the Brexit deal agreed between UK PM Boris Johnson and the EU, thereby ending more than three years of political gridlock. There were also reports suggesting that there will be a second reading of the Withdrawal Agreement next Friday.

As for the pound, although it may correct a portion of yesterday’s overstretched rally, the overall near-term outlook remains bright. However, even if the Brexit deal is sealed before the January 31st deadline, there is still the transition period during which the UK will negotiate a new relationship with the EU, including trade. Thus, we will still have an element of uncertainty in the new year.

GBP/JPY – Technical Outlook

GBP/JPY skyrocketed after the UK election exit polls pointed to a large parliamentary majority for the Conservatives Party. The rate breached several resistance barriers in a row, to eventually hit resistance slightly below the 148.05 level, marked by the high of March 20th. In the somewhat bigger picture, the pair is trading above an upside support line drawn from the low of November 22nd, which keeps the near-term outlook positive.

However, bearing in mind that the election rally appears overstretched, we see the case for the rate to correct somewhat lower, perhaps to test the 147.00 or 146.50 barriers as supports. The bulls may decide to recharge from near those zones and perhaps push for another test near the 148.05 zone. A break higher would confirm a forthcoming higher high and may pave the way towards the 148.85 area, defined by the high of March 14th. If that level is also broken, then we could see the advance extending towards the 149.50 zone, which provided strong resistance between September 21st and November 8th last year.

Looking at our short-term oscillators, we see that the RSI lies well above 70, while the MACD stands above both its zero and trigger lines. Both indicators detect strong upside speed and support the notion for some further advances. However, the RSI shows signs of topping within its above-70 zone, which comes in line with our view that a small retreat may be in the works before the next positive leg.

In order to start examining the case of a larger negative correction, we would like to see a clear dip below 146.50, which is near the high of May 3rd. Such a move could set the stage for declines towards the 145.40 zone, the break of which could aim for the 144.75 barrier, marked by the inside swing low of the same day.

GBP/JPY 4-hour chart technical analysis

Risk Appetite Boosted from US-China Tentative Deal

Elsewhere, the weakening of the safe-havens JPY and CHF, as well as the relative strength of the commodity-linked AUD and NZD suggest that risk appetite was supported. The initial boost came after US President Trump twitted that the US is getting very close to a big deal with China, with the euphoria extending following news that the world’s two largest economies have reached a “deal in principal”, an earlier-than-expected step towards revolving a nearly two-year trade war. All three US indices hit record highs, while the Chinese yuan hit its highest since August 1st against its US counterpart. Today, during the Asian morning, Japan’s Nikkei 225 and China’s Shanghai Composite gained 2.55% and 1.78% respectively.

Major stock indices performance G10 currencies

The cheering of the Tory victory in the UK and the progress in the US-China saga may keep risk sentiment supported for a while. However, as with the UK-EU relationship, the US-China riddle is not fully resolved. A final accord is not sealed yet and thus, we still cannot rule out any conflicts in the process towards achieving that. For now, we see a positive picture with regards to investors’ morale, and thus, we would expect currency pairs, which act as sentiment gauges, to stay under some buying interest. Some of them are AUD/JPY, AUD/CHF, NZD/JPY and NZD/CHF.

Apart from the UK elections and the tentative US-China deal, we also had an ECB policy meeting yesterday. The Bank kept interest rates untouched, with the statement not deviating from the previous one. “The Governing Council expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics,” officials noted.

At the press conference, the new ECB Chief, Christine Lagarde, reiterated Draghi’s words that officials stand ready to adjust all their instruments as needed, and that the risks remain tilted to the downside. That said, she added that the risks are less pronounced and that there are some stabilization signs in growth slowdown. The relatively upbeat comments from Lagarde helped the euro to gain somewhat, but the currency got a stronger boost from the UK election exit polls.

AUD/CHF – Technical Outlook

AUD/CHF rallied yesterday, breaking above the key resistance (now turned into support) zones of 0.6780 and 0.6795. The advance was stopped slightly below 0.6840 and then it retreated somewhat. That said, the move has confirmed a higher high on the 4-hour chart, which suggests that the short-term outlook has now turned somewhat positive.

If the bulls are willing to take the reins again soon and manage to drive the battle above 0.6840, then we could see them aiming for the 0.6858 territory, marked by an intraday swing high formed on November 8th. If that level is not able to halt the rally either, then we may experience extensions towards the 0.6888 level, defined by the high of November 7th.

Shifting attention to our short-term oscillators, we see that the RSI has started topping near the 70 line, while the MACD, although above both its zero and trigger lines, shows signs that it may start topping as well. These indicators suggest that some further retreat may be in the works before, and if, the buyers decide to jump back into the action, perhaps for the rate to test the 0.6795 zone as a support.

In order to abandon the bullish case and turn back flat, we would like to see a dip below 0.6780. This may pave the way towards the 0.6746 area, the break of which may extend the slide towards the 0.6715 hurdle, marked as a support by the lows of November 19th, 21st and December 4th.

AUD/CHF 4-hour chart technical analysis

As for Today’s Events

During the US session, we get the US retail sales for November. Both the headline and core rates are expected to have increased somewhat, to +0.5% mom and +0.4% mom, from +0.3% and +0.2% respectively.

We also have two speakers on today’s agenda: ECB Vice President Luis de Guindos and New York Fed President John Williams.

Disclaimer:

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