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#SaxoStrats
The Thanksgiving holiday may be over but the US dollar has little to be thankful for – it's still struggling against the euro and the yen and is likely to point lower still. But oil is doing well and WTI crude has hit a two-year record.
Article / 14 September 2017 at 7:33 GMT

FX Update: BoE to end sterling rally? — #SaxoStrats

Head of FX Strategy / Saxo Bank
Denmark
  • 'Trump trade' re-emerges as president bargains with Dems
  • BoE unlikely to adjust policy based on August CPI print
  • 'Slide to 1.3000 could be in the offing' for GBPUSD

Donald Trump
Renewed political wrangling by the Trump administration has pushed the prospect 
of a tax reform deal to the forefront again. Photo: Shutterstock

By John J Hardy

The USD has backed up from its recent slide, with at least some of the firming a product of US president Trump’s political pivot to deal-making with the Democratic leadership in Congress. It now appears (between the lines) that he rescinded the DACA measures in order to use them as a bargaining chip with Democrats, a move that could lead to further agreements on tax reform (the most important factor for USD could be any agreement on repatriation of foreign corporate profits).

Trump could also be engaging in some political horse-trading in order to boost infrastructure spending down the road, if not funding for the border wall promise. 

The debt ceiling issue is now off the front burner until March of next year as new emergency measures to keep the government funded into the New Year have also been agreed upon. 

Has Trump turned the corner here? 

The Bank of England meeting today is highly anticipated after reasonably solid data of late and the strong surge in the August CPI readings. As we discussed yesterday, however, our reread of the August statement has us wondering whether the BoE is willing to make any upgrade in its language after thoroughly explaining that it is willing to look through uncomfortably high inflation (which is only linked to sterling weakness, something that has been entirely absent of late) and is concerned about the Brexit process, which is going nowhere. 

Odds point to a BoE that fails to encourage any upgrade of the policy path, in our estimation.

Chart: GBPUSD

Cable could be a big mover on the day if the BoE is fairly emphatic that it will continue to sit on its hands for some time to come and look for clarity from the Brexit process before shifting its forward policy guidance. A slide to 1.3000 could be in the offing. On the other hand, if we get a surprising hawkish upgrade after its dovish August statement, the next upside level is 1.3500 – a level whose importance dates back to the '80s.

gbpusd

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Source: Saxo Bank 

The G-10 rundown

USD – firming could be set to continue as policy potential has suddenly returned to the mix after the long depletion of the Trump Trade balloon since the election.

EUR – a bit of a correction has set in now that we have worked below 1.1925-00 in EURUSD, which could open the chart toward 1.1700 or even lower.

JPY – USDJPY looks short-term overbought, but we are looking for the pair to follow the direction of bond yields and wondering if the Bank of Japan finally risks providing a little drama next week – especially if yields rise sufficiently to see the Japanese 10-year JGB challenging the apparent cap near 10 basis points (current yield is only 4 bps).

GBP – again, sterling has recently backed up considerably on the shift in UK short rates higher – only room for upside from here would likely be on a BoE abandoning the caution from its August statement... isn’t it too early to expect an about-face?

CHF – not expecting anything form the Swiss National Bank today, but it might take a fresh surge in global yields to prompt a break above 1.1500 in EURCHF, where it seems difficult for the pair to develop directional independence from other EUR pairs.

AUD – the fundamentals pulling in opposite directions as iron ore pushed to six-week lows overnight while the market focuses on the very positive jobs report that has taken AU short rates to new highs for the cycle. 0.8000 looks like the bull-bear line on daily and weekly closes.

CAD – the resurgent greenback is keeping the bears at bay for now, but it will take a very considerable further squeeze to turn the tables – watching the 1.2335 area, which is the first Fibo retracement as the first key test of the downtrend if yesterday’s highs can’t hold.

NZD – another poll showing a strong result for Labour after a prior poll showed the opposite is giving kiwi traders whiplash – in general we like NZD lower versus USD and AUD but we’re tactically cautious until we get to the other side of the September 23 election.

SEK – watching whether today’s Swedish data can move the needle either way – as a squeeze scenario is possible if the action take EURSEK above 9.60, while bears are frustrated by two recent false breaks lower.

NOK – oil prices are NOK-supportive, but the developments in Norwegian rates are not. The upside trigger level is the closest just above 9.40 for a possible try at the highs of the cycle.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0730 – Switzerland SNB Rate Announcement 
  • 0730 – Sweden Aug. Unemployment Rate 
  • 1100 – UK BoE Announcement 
  • 1230 – US Weekly Initial Jobless Claims 
  • 1230 – Canada Aug. New Housing Price Index 
  • 1230 – US Aug. CPI 
  • 1530 – Euro Zone ECB’s Weidmann to Speak 
  • 1600 – Euro Zone ECB’s Mersch to Speak 
  • 2100 – New Zealand Aug. REINZ House Sales 


— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank

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