It has been an interesting 24 hours for sterling and no surprises that Brexit related political developments being the driver behind the relatively large intraday swings. Initially sterling came under renewed pressure following the finalisation of the latest round of talks between the UK and EU with EU negotiator Barnier commenting that talks were at a deadlock. This particular message was jumped upon by markets with sterling falling against its major peers and breaking through the key 0.9000 level versus the euro and hitting a .9029 low (GBPEUR 1.1075). The focus on the deadlock comment meant markets missed another key comment by Barnier that a breakthrough is still possible though before the end of 2017, which importance became apparent at the London close when various news agencies reported that the EU is in fact looking to offer a two year transition deal, albeit subject to settlement of financial commitments. As a result, we saw a large sterling rally post the European and London closes with EURGBP moving as low as .8877 (that’s an almost 1.7% high low move in less than 24 hours). Similarly too, GBPUSD moved higher after initially hitting 1.3130 lows and is now trading back above 1.33 this morning.
These moves suggest some form of support for sterling at the moment but it’s unlikely this price action has reflected any changes in rate hike expectations. With the possibility of a Bank of England rate hike in November substantially higher, interestingly the British Chambers of Commerce have been very vocal this morning stating that such a rate hike would be a major mistake. Although a business lobby group supporting a rate hike would be like Turkeys voting for Christmas. From an ECB perspective, another report circulating this morning suggests the ECB are considering cutting their monthly bond buying by at least half starting in January and keeping their program active for at least nine months, reducing quantitative easing to €30bn a month from the current pace of €60bn. This story seems to have added another down leg in the move lower by EURGBP. Also, as a result EURUSD has fallen but only to 1.1820.
On the US front, it’s not quiet there either with the latest inflation report due out at lunchtime with the headline reading expected to show a jump to 2.3% from 1.9% last month. Still, a strong reading will certainly apply pressure to the US Fed and increase the chance that they will hike rates again before year end. Such an outcome is likely to be dollar supportive especially against a backdrop of 4 days of losses for the dollar against the euro, potentially presenting traders to take some profit. Yesterday’s high of 1.1880 will continue to offer a strong line of resistance as it represents the 50% retracement line from the recent 1.2090 – 1.1670 sell off. On the way down we see support at 1.1785/90 and 1.1740. For cable, the recent see saw action is likely to remove the short bias and so resistance should be seen at 1.3340/55 in the near term and on the flip support is seen at 1.3260 and then 1.3210. The inflation report is followed by other key economic releases in the form of US Retail Sales and the University of Michigan Confidence Survey.