FX Update: Brexit trumps BoE for GBP outlook

Markets will scrutinise the Bank of England’s voting pattern (6-2 or 5-3, etc.) and degree to which the recent rise in UK inflation is seen by the monetary policy committee members as temporary and mostly linked to the lagged effect of the large sterling devaluation after the June 2016 Brexit vote (that’s our strong view) or a sign of a more important shift higher in the inflation outlook. 

It’s hard to see why the BoE should be in any hurry to raise rates now rather than later, given sluggish second-quarter growth and a trade-weighted exchange rate that is more-or-less unchanged over the last 12 months. If the BoE manages to surprise to the upside, however, EURGBP may be the pair of choice for expressing sterling strength, given the euro’s over-the-top strength of late that may be getting overextended, while an indifferent/dovish BoE might see weakness in sterling. 

Australia’s June trade surplus came in far lower than expected, knocking the Aussie back a bit lower. The Aussie has broken higher on the recovery in key commodity prices that are boosting the outlook for Australia's important mining sector, while the rest of the economy continues to grow on easy credit and a housing bubble. That may be at risk of turning in coming quarters, as the slowing in building activity and turnover should prove a leading indicator for price developments.

US president Donald Trump reluctantly signed a sanctions bill that drew broad bipartisan support in Congress, and Russia retaliated with pointed rhetoric as prime minister Dmitry Medvedev said it amounts to a full-scale trade war. The key here for further effects on the rouble and oil prices would be in the degree of implementation of the optional sanctions, which may be very limited: will the US really sanction EU companies helping to service and build Russia’s pipelines for gas and oil exports? This would obviously quickly get the US into hot water with EU trading partners. The EU’s Juncker has already warned about this.

The GBPUSD chart appears technically strong for a continuation of the rally, with overhead room to 1.3500, the major resistance after the Brexit vote last year and. But if the BoE is dovish and the greenback is in a consolidation mood today, it could test the key range support in 1.3000-1.3050.

USD – there's been a bit of consolidation back to the strong side against the commodity currencies and many emerging-market currencies, but the USD selloff is very much alive against the very strong euro. It is hard to identify what the market is looking for to trigger a change of view, and doubtful whether US data has much impact over the next couple of days, unless average hourly earnings tomorrow surprises loudly to the strong side.

EUR – EURUSD can’t seem to post a respectable reversal, as yesterday’s stumble was quickly erased for a shot above 1.1900. The 1.2000 area may provide more robust resistance if it comes into play.

JPY – there's little to note here as bond yields have largely gone to sleep. 110.00 is the immediate focus for USDJPY after the recent test and the EURJPY pivot comes in around the just-broken 130.60 area.

GBP – sterling looks technically strong against the USD if the Bank of England manages to provide a sufficiently hawkish twist, but two-way risks as we discuss above.

CHF – EURCHF manages to touch 1.1500 – wondering if the pair faces resistance soon, simply on the size of the recent move and the achievement of a round number objective.

AUD – room for more consolidation lower in AUDUSD without threatening the rally – first focus at 0.7875 recent range low.

CAD – Room for more consolidation in USDCAD into 1.2800 after the brutal move lower – and the 38.2% retracement of the entire selloff sequence doesn’t come in until the 1.2920 level.

NZD – test of the 0.7350-0.7400 pivot zone needs to survive to keep the focus higher for AUDNZD, otherwise the bears have a reversal case.

SEK – the market ignores very strong Swedish economic data (latest is today’s strong services PMI at 59.0), which can’t seem to shift the Riksbank outlook outside the range. Still prefer EURSEK downside if 9.65 holds.

NOK – prefer EURNOK downside if the 9.40-ish range holds – but a bit unsettling that latest surge in oil prices hasn’t proven more NOK supportive.

— Edited by John Acher