- GBP/USD correcting higher very near term on soft Dollar.
- Brexit and trade wars, whichever is resolved first, there within lies the trade.
GBP/USD is holding in on the 1.21 handle with a tendency to the upside, having travelled from a low of 1.2121 to a high of 1.2190. The Dollar of late has been under fire due to the fall out between the Chinese and the US over trade. The US yields have been in freefall while, to the contrary, the BoE looks set to go and raise rates at some time whenever the Brexit malice is put to bed, or on the verge of a solution.
For now, sentiment for Brexit as well as trade should remain rocky and that should reinforce support of safe havens, (but not the Dollar), but depending on which geopolitical gridlock looks set to be resolved positively first, there lies within the trade.
As for positioning, considering how net short GBP positions increased for an eleventh consecutive week in response to Johnson taking the role of UK PM and his determination to stick to the October 31 deadline for the UK’s withdrawal from the EU, short-covering on good Brexit news could propel cable higher, especially when compared to market positioning in the dollar, there is much more room to go in the downside.
However, much now depends on the Federal Reserve’s perception of these latest developments with regards to the US and China’s stand-off on trade. The perception that the Fed’s July rate cut may not have been the start of a sustained easing cycle has now been contested by the market, where otherwise a drop in risk appetite would have been a factor that could provide additional USD support if it were not the perception that the Federal Reserve is about to cut rates again as soon as September.
Fading risk rallies is supporting GBP/USD
There were some signs of hope yesterday that the US is merely playing bluff to get a reaction out of China which gave some relief to the markets. US stocks rallied, yields recovered some ground and the Dollar turned bid on hopes of trade talks continuing next month. However, as analysts at Rabobank wrote, “But from a longer-term perspective, if someone says they will cut off your hand, then merely removes three fingers, is it really time to go long gloves? I would argue not – and that is where we still are on US-China: gloves are off.”
Fed’s Evans advocates rate cuts
And indeed, the markets seem to be of the same mind today and Fed’s Evans floated the idea of cutting rates further:
- On the basis of the low US inflation alone, July interest rate cut was justified and more policy accommodation needed.
- Economic headwinds mean cutting rates further could be reasonable.
- Brinkmanship trade negotiations mean volatility, we have to be paying attention.
- Could also argue that risk management calls for more accommodation.
- He sees midcycle adjustment as Fed now aiming for 50 basis points below the neutral rate, rather than 50 basis points above.
As a result, we have seen the US 10-year yields down another 2.87%, DXY falling -0.15% and USD/JPY down -0.63% and gold has moved through major $1,500 psychological level en route to 2011 highs. US stocks have found some stability of additional rate cuts, but that is hardly a positive in the long-run as it is unsustainable and could be a further blow for the Dollar somewhere down the line.
GBP/USD levels
Analysts at Commerzbank noted that GBP/USD is consolidating/correcting higher very near term:
“Last week the market sold off to the base of its short term channel at 1.2011 and the January 2017 low at 1.1988. Last weeks low was 1.2080, but given the 13 count on the daily chart we would allow for this to hold the initial test and prompt a near term rebound. Below here lies the 1.1491 3 rd October low (according to CQG). Rallies, if seen, should struggle circa 1.2320. It stays negative while contained by its 2 month downtrend at 1.2437 today. Above the downtrend this would introduce scope to the 55 day ma at 1.2536 and the June high at 1.2784.”
Share
