Sterling drops amid fresh Brexit turmoil
- The British pound opened with a negative gap today, and continued lower in the next hours, following media reports over the weekend regarding domestic UK politics and Brexit. The first report suggested renewed turmoil within the Conservative Party, with 40 Tory MPs having agreed to sign a letter of no confidence in Theresa May. This story follows the recent resignation of UK International Development Secretary Priti Patel, and highlights once again how fragile the balance of power is within the Conservative party. Meanwhile, the EU’s chief negotiator Michel Barnier said that the EU is preparing plans for the possible collapse of the Brexit negotiations. The rest of his comments sent the message that the clock is ticking, and that for the Brexit talks to move on to the subject of trade, the two sides would need to reach an agreement on the porce bill within the next few weeks.
- Overall, these developments confirm our prior view that with the BoE out of the spotlight for now, market attention was likely to turn back to the highly uncertain world of UK politics. In this respect, we still see a somewhat negative picture for the British pound, amid continued lack of progress in the Brexit talks, and with Theresa May struggling to retain her position domestically. Yes, the currency could rebound a little in the near-term, should the two sides finally manage to settle the porce bill and move forward. However, these negotiations have already been delayed very significantly on what should have been a relatively simple matter to settle; the porce bill. This implies that even if we do begin to discuss the more complex subject of trade soon, we could well see fresh delays and disagreements in that process, something likely to heighten uncertainty even further and thereby, work against the pound over time.
- GBP/USD gapped down on Monday and continued drifting lower during the Asian morning. The rate opened below the support (now turned into resistance) barrier of 1.3175 (R1) to stop fractionally above the 1.3100 (S1) zone. The rate is still trading within the sideways range between that barrier and the resistance zone of 1.3340 (R3) and as such, we consider the short-term picture to be flat at the moment. Before we get confident on more bearish extensions, we would like to see a decisive dip below the crossroads of the 1.3100 (S1) zone and the upside support line taken from back at the low of the 7th of October 2016. Such a break could initially aim for the 1.3040 (S2) hurdle, where another dip could set the stage for more declines, perhaps towards our next support of 1.2975 (S3).
- EUR/GBP edged north on Monday, but the advance was stopped by the 0.8880 (R1) resistance zone. If buyers are strong enough to overcome that barrier, then we may experience further bullish extensions, perhaps towards our next resistance of 0.8880 (R1). Having said that, although the rate could continue higher for a while, it is still trading within the sideways range that’s been in place since mid-September, between 0.8750 (S2) and 0.9020. As such, we still see a neutral short-term outlook. We prefer to wait for a clear close above 0.9020 before we start evaluating the case for a positive picture. On the downside, a dip below 0.8750 (S2) would confirm a forthcoming lower low and could shift the outlook to negative.
- The economic calendar is empty, with no major events or indicators on the agenda.
- As for the speakers, we will hear only from ECB Vice President Vitor Constancio.
As for the rest of the week:
- On Tuesday, during the Asian day, we will get China’s retail sales, industrial production and fixed asset investment, all for October. In both the UK and Sweden, CPI data for October will be in focus. On Wednesday, Australia’s wage price index for Q3 is due out, while from the UK, we get the employment data for September. Over in the US, both CPI and retail sales data for October are coming out. On Thursday, we get Australia’s employment figures and UK retail sales, both for October. Finally on Friday, Canada’s inflation data for October will be in the spotlight.
Support: 1.3100 (S1), 1.3040 (S2), 1.2975 (S3) Resistance: 1.3175 (R1), 1.3235 (R2), 1.3340 (R3)
Support: 0.8800 (S1), 0.8750 (S2), 0.8715 (S3) Resistance: 0.8880 (R1), 0.8935 (R2), 0.8975 (R3)