- GBP/USD under pressure in the main, despite short term upside correction.
- Brexit, BoE and risk-off potential flows to impact to the downside.
GBP/USD is currently trading at 1.3024, topping out at highs of 1.3033 having travelled up from a low of 1.2954 on the day. The US dollar has been under pressure following a slight disappointment in the US Consumer Price Index which reinforces the Federal Reserve’s neutral stance, which traders get set for the official details of a US/Chinese phase-one deal.
The latest trade chatter came late in the New York day when reports that existing tariffs on billions of dollars of Chinese goods coming into the US are likely to stay in place until after the American presidential election.
“Any move to reduce them will hinge on Beijing’s compliance with the terms of a phase-one trade accord, people familiar with the matter said,”
Bloomberg News reported.
UK economy not in good shape
Casting eyes over the UK economic backdrop, sterling will likely continue to struggle, especially in a risk-off environment should the details of a Sino/US trade deal disappoint expectations which has so far instilled risk appetite into markets over some weeks leading into the year-end. With Brexit trade deal negotiations likely to add some flavour to risk flows, cable could be set to create some trading opportunities given its relatively high ATR.
Scottish referendum request cast aside by PM Jonhson
A sleeping giant of risk for the pound would come in the form of a Scottish referendum. However, UK’s PM Boris Johnson has already squashed such concerns in a letter wrote and sent to Scottish First Minister Nicola Sturgeon today, refusing her request to be given the powers to hold another Scottish independence referendum. A referendum cannot take place without the consent of the UK government. Sturgeon wrote to Johnson in December asking him to enter negotiations on transferring the power to hold a referendum from London to Edinburgh.
“While today’s response is not surprising – indeed we anticipated it – it will not stand,” Sturgeon said in a statement.
“It is not politically sustainable for any Westminster government to stand in the way of the right of the people of Scotland to decide their own future and to seek to block the clear democratic mandate for an independence referendum.”
“Democracy will prevail,” she added.
BoE sprinkling bearishness over the pound
The Bank of England is also a drag on the pound. We have seen a series of voting members of the Monetary Policy Committee sprinkle their dovish remarks over sterling of late.
The latest came from Gertjan Vlieghe, an external member of the rate-setting committee, when he signalled on Sunday that he will vote for a cut on Jan 30th if economic data does not improve. Mr Vlieghe told the Financial Times: “Personally, I think it’s been a close call, therefore it doesn’t take much data to swing it one way or the other – and the next few [MPC] meetings are absolutely live.
“I really need to see an imminent and significant improvement in the UK data to justify waiting a little bit longer.”…
We will now wait to hear from MPC member Saunders, a former hawk turned dovish, to speak in Northern Ireland on Wednesday at 0840GMT. Former hawk, Saunders, hurt GBP when he turned dovish last September. Both Saunders and Haskel then voted in favour of a BoE rate cut in Nov and December.
The Jan 30th BoE rate cut probability is now up to 50% vs 5% last Thursday following a series of poor economic data at the start of this week. The next round of data will come in the UK’s December inflation data (Consumer Price Index) also due on Wednesday (at 0930GMT) expected +1.5% YoY.
There are more sell orders expected ahead of 1.3050, given that 1.3045 was Monday’s high. Valeria Bednarik, the Chief analyst at NDDFX explained that “the short-term picture indicates that the risk is skewed to the downside, as the pair remains below the 23.6% retracement of its latest daily decline at 1.3050. In the 4-hour chart, the pair is currently battling with its 20 SMA, and below the larger ones, while technical indicators head nowhere just below their midlines.”