Sterling Shines While Euro Stalls in Front of $1.20

(The next leg of the business trip takes me to Frankfurt. Sporadic updates will continue)

Sterling has extended yesterday’s gains
scored in response to the slightly higher than expected August CPI. 
 It is trading at its best levels
since last September. Chancellor Hammond’s suggest that the UK will seek a
transition period that is essentially an extension of the status quo fans hopes
of a softer Brexit and this is also seen as supportive for sterling.  
The August employment data
is awaited. 
main issue here is not job growth per se.  As has been the case in the US
and Japan too, job creation in the UK appears fairly healthy.  The problem
is the limited wage growth.  This is arguably a more acute issue in the UK
because of the rise in inflation, which saps the purchasing power of
households.   The Bank of England’s Monetary Policy Committee meets
tomorrow.  At full force, now that a new Deputy has been named, a 7-2 vote
is expected in favor of standing pat.  
We have been identifying the
$1.3430 area is a reasonable technical target for sterling.  
It represents the 50% retracement of
sterling’s losses since the day of the referendum June 2016 when it briefly
traded $1.50.  Also helping sterling is the unwinding of short cross
positions against the euro.  The prospects that the ECB tappering, which
some participants had seen as urgent due to the self-imposed rule on the asset
purchases, now appears to be a more prolonged process that could persist well
into 2018, may have encouraged some profit-taking.  

The euro poked through
GBP0.9300 in late August amid calls from many investment houses for a move to
At the peak,
it had moved beyond its upper Bollinger Band (two standard deviations above the
20-day moving average).   In the first part of September, the euro has
pulled back 3.5% against sterling and is now moving below its lower Bollinger
Band.  The low for the cross this year was reached before the French
elections in April near GBP0.8315.  The GBP0.8930 area represents a 38.2%
retracement of the four-month rally.   
In addition to the violation of
the lower Bollinger Band, the slow Stochastics are showing preliminary signs of
a bullish divergence for the euro.  

US 10-year Treasuries fell
for the second session yesterday, lifting the yield to a two-week high near
last week end, the yield brief traded near 2.03%.   Similarly, the 10-year
German bund yield jumped from about 29 bp before the weekend, a two-month low,
to over 40 bp yesterday, a three-week high.  It stalled there and is
slipping a little today.   
The rise of yields had
helped lift the dollar from JPY107.30 that had been approached before last
weekend above JPY110.
  However, with
yields stalling, the dollar is trading in narrow ranges as the momentum eases.
 The high from late August was seen near JPY110.65 and this offer a nearby
cap.  We peg initial support near JPY109.40.  
The euro recovered from its
push toward $1.1925 yesterday to trade nearly $1.20 in Asia. 
 Although it has stalled there in
early European turnover, the market does not appear to have given up.  We
suspect that it can push toward $1.2020 before some of yesterday’s bottom
pickers take some quick profits.  The next key technical objective we have
noted is found near $1.2165, the 50% retracement of the euro’s slide from the
mid-2014 high.  
Technically, this suggests
the euro’s stronger than anticipated recovery this year is still well within
the parameters one would expect in a correction, rather than a new trend.
   Having talked with many
people attending the TradeTech Europe FX conference in Barcelona, we remain
struck with extreme negativity to the dollar, with some participants suggesting
potential toward $1.30-$1.50.  The pessimism toward the US is palpable.
 The possibility that Yellen gets reappointed, that the Fed raises rates
again over the next 15 months, or that tax reform is delivered are seen as
extremely low.  We suspect the source of volatility will come from one or
more of these events taking place.  


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