Market News & Insights
15 November 2016

Sterling Eyes Inflation for Direction

Yesterday continued to be all about the USD as the dollar index rallied to levels not seen since last December and close to 13.5 year highs as US bond yields pressed higher on market expectations that Trump’s policies will stoke inflation. Rising yields favored USD demand and with that we saw the dollar advance almost across the board. USDJPY trading to levels not seen since June 2nd, EURUSD trading towards lows not seen since December 3rd while the USD also advanced against last week’s strongest performing currency, the British pound.

Overnight however we have seen that slip and we have seen USD and GBP selling to welcome in the new trading day this morning. EURUSD has already rallied over 1% from yesterday’s lows, while EURGBP is up over 1% as well, following a BBC report suggesting there could be a 6 month delay in Article 50 as a leaked report suggests there is no agreement in cabinet. One thing is certain, we are in a period of heightened volatility and with that volatility we can see erratic market movements. This can create significant opportunity to place prudent hedges or avail of favorable spot rates for FX transactions, especially when we enter levels we have not seen for a long period of time but direction will not be one way and gains in one currency pair can be rapidly eroded as sentiment shifts. These markets are not to be taken for granted.

GBP was one of the best performers of last week, sterling advancing almost across the board, even against the dominant USD, however Brexit still carries downside potential for the pound and many continue to look at any rally in GBP as an opportunity to sell. This may limit the pound’s upside potential put one piece of data that will support the GBP is the inflation print. Today we see the CPI reading from October for the UK, the BOE’s inflation report has already highlighted concerns that inflation is rising faster than expected and will likely go beyond the BOE’s target of 2%, thus limiting potential scope for additional easing should they look to maintain some control over inflation. CPI inflation is expected to have risen 1.1%, up from 1%, while the core reading is expected to decline to 1.4%. Anything firmer will once again provide some intraday support for the pound so below are some key levels.
EURGBP: Support below .8582 attract for now on a strong inflation reading, a break below their targets progression back towards .8500 area. .8750 offers resistance to the upside, however we have firmer technical resistance ahead of .8800 where we would expected EUR sellers to emerge. GBPUSD has resistance to the topside once we get above 1.2600, while 1.2355/65 should hold moves lower for now. A break below there and we fall back into lower rotation between 1.2300 and 1.2100.