Article / 13 October 2017 at 7:26 GMT

FX Update: GBP blasts higher as EU offers a carrot — #SaxoStrats

Head of FX Strategy / Saxo Bank
Denmark
  • GBP volatile on news from Brexit negotiators
  • US CPI data likely impacted by September hurricanes
  • EURGBP trade could see pair approach 200-day MA

London
Sterling is in a high-volatility pattern as Brexit talks, and negotiations over the "divorce bill" in particular, take centre-stage. Photo: Shutterstock 

By John J Hardy

Sterling sold off heavily yesterday as European Union Brexit negotiator Michel Barnier pointed to a “deadlock” in current negotiations over the Brexit divorce bill. But the currency later rallied steeply as he indicated that the December round of talks could move to talks on trade if more progress is made on the rights of EU citizens and the divorce bill. 

As well, Barnier indicated that the EU would start an internal debate on the potential terms of a trade deal. It is clear that the divorce bill is a major hurdle for the UK, as it is a tough sell for the domestic audience for Prime Minister May to offer anything near the €50 billion and similar amounts that have been bandied about. Still, this dangling of a carrot from the EU could move the UK into line on a divorce bill. 

Data today from the US is widely anticipated to have been affected by the hurricanes Harvey and Irma, with gasoline prices driving a strong advance in the headline CPI and Retail Sales also expected strong for the month. The surprise side, therefore, would be data that miss on the soft side. 

A couple of Fed speakers and Federal Open Market Committee voters (Evans and Kaplan) are out later, but it feels like the market is immune to Fed comments until we get a name on the nominee to replace current chair Janet Yellen (we see Yellen as highly unlikely to be renominated). 

President Trump’s chief of staff said that Trump would conduct further interviews in addition to the already known shortlist, but no specific names were dropped.

Chart: EURGBP

EURGBP posted a spectacular candle yesterday that points to a dramatic shift of sentiment if the Brexit talks can clear the divorce bill hurdle and move on to trade in December. Further ad hoc risks from headline announcements on the issue will be important, but this looks like a notable shift that could take the price action back toward the 200-day moving average, currently rising toward 0.8750.
eurgbp

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Source: Saxo Bank 

The G-10 rundown

USD – hard to see the upside catalyst from the US data today given that strong numbers are expected, so this points to the risk of more downside – we’ll call the 21-day moving average in EURUSD/USD index an approximate bull/bear line here.

EUR – the euro suffering a bit under the weight of the sterling advance late yesterday and this morning, but still holding its own against the US dollar. The EU summit next week the next political focus. Meanwhile, in Italy, the parliament is conspiring to pass an electoral law that could limit the Five Star Movement’s success at the next Italian election.

JPY – the yen pulling stronger to new local highs against the US dollar, with a pivotal support zone in USDJPY coming into view below 112 – and extending to perhaps 111.00.

GBP – sterling roaring back from yesterday’s weakness as we may have undergone a major sentiment shift with the potential prospect of breaking the Brexit negotiation logjam.

CHF – EURCHF bulls have not yet delivered the knockout punch to take the focus to potential for new highs for the cycle.

AUD – strong Chinese trade data overnight buoying the Aussie, which is looking to avoid the downside pivot zone that it teased over the last week if it closes today and this week on a strong note above 0.7850. Then focus will move on the China party congress starting next week.

CAD – potential to 1.2250 or lower if USDCAD can’t retake 1.2500. Next Friday’s Canadian CPI data next are a focus on the economic calendar.

NZD – looking for political news over the weekend for direction as New Zealand First set to choose which side of the aisle to support. NZDUSD has launched a bullish reversal bid that gains credibility if it can maintain above the 200-day moving average (currently near 0.7160) next week after the political event risks.

SEK – weak Sweden September CPI drove a fresh squeeze in EURSEK, watching whether it is maintained above the 200-day moving average (9.58-ish) for a go at the summer highs near 9.80.

NOK – interesting to see NOK and SEK headed in opposite directions and NOKSEK gets interesting if it can levitate above 1.0300-50 cap of the last many months.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1200 – Poland Sep. CPI 
  • 1230 – US Sep. CPI 
  • 1230 – US Sep. Retail Sales 
  • 1400 – US Oct. Preliminary U. Michigan Sentiment 
  • 1415 – Euro Zone ECB's Constancio to Speak 
  • 1425 – US Fed's Evans (FOMC Voter) to Speak 
  • 1530 – US Fed's Kaplan (FOMC Voter) to Speak 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank

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