Article / 07 July 2016 at 7:00 GMT

Morning Markets: GBPUSD anchored below 1.30

Former managing editor, / Saxo Bank



  • Germany: Industrial Production                          (0600 GMT) 
  • US: ADP Employment Report                             (1215 GMT)
  • UK: NIESR GDP Estimate                                   (1400 GMT)

GBPUSD may have come off those shocking 31-year lows in the last couple of sessions, but the rebound is lukewarm and remains firmly anchored below the key 1.3000 area. The sense that this is not a road back to the relative safety of the low 1.30s is palpable and the flight to safe-haven assets only increases the conviction.

The yield on 10-year gilts has near halved since referendum day on June 23 to 0.731%, the ten-10 year yield is at a record low and German Bund ten-year yields have slipped ever further into negativity. Gold continues to prosper on the back of the safe-haven flight hovering around the $1,370/oz mark and yet more money poured into the Japanese yen with USDJPY circulating around 100.70 in the runup to the European open.

Where does this end for sterling? $1.20 has been cited by a number of experts as a potential bottom which, if it materialises, would represent a 20% slide on the June-23 high of $1.50 when post-referendum polls had initially suggested the 'Remain' camp was likely to emerge winner of the referendum on exiting EU membership.

Talks of a trade deal with China might offer a temporary lift, but the reality is that these things take an age and secondly, Beijing ought to be able to exploit a very weak negotiating position — just ask the Russians — as the reality of relative isolation in London strikes home.

While sterling's fall seems to offer a damning indictment of the Brexit, equities quickly recovered their post-Brexit losses in the week after, but a more sober reality is emerging again as the FTSE 100 fell 1.25% yesterday and the FTSE 250 — more closely tied to the UK economy — is still approximately 10% down on the June 23 close.

Ironically, it is Eurozone banks that are currently taking the brunt of the Brexit earthquake as structural flaws in the sector are exposed by the fallout. Deutsche Bank hit a 25-year ow Wednesday and the dark clouds gathering over the gaping wounds in the Italian banking sector have raised very real fears of contagion.

With European Central Bank stress tests slated for the end of July, the requirement that lenders add 30% or more to their capital bases has quite possibly come at the worst time for the sector, laudable though that requirement may be.

Elsewhere, the steady depreciation of the yuan continued apace as USDCNH rose to 6.704 before suddenly diving back below the 6.700 mark which may well be the line in the sand, for now, for the People's Bank of China. USDCNH was steadily climbing towards 6.700 again in the hour before the European open.

But two weeks now since the fateful day that the UK decided to turn its back on Europe, we are still ruminating on the fallout from the Brexit verdict. The fear now is that it may become the catalyst to a bigger and perhaps even nastier crisis.

Market signals

Asian session

  • Gains on Wall St overnight lifted sentiment in Asia
  • Crude oil prices rose on dwindling oversupply concerns to $47.62/barrel
  • BoJ's Kuroda says the central bank can expand monetary stimulus further if needed 
  • Australia's construction industry soared in June; the AiG index was up 6.5 points to 53.2
  • AUD took a tumble after Standard & Poor's said the country's AAA credit rating was at risk
  • The AUD fell around half a US cent to US 74.7 cents, but later recovered to US 75.1 cents
  • The yen strengthened for a third day and gold extended gains near a two-year high
  • The yen rose 0.4 to 100.92 to the dollar as of 0355 GMT
  • GBP added 0.4% to $1.2977, after sinking to $1.2798 on Wednesday
  • The Nikkei 225 was down 0.5% at 0503 GMT, down 76 points to 15,302.35
  •  At 0507 GMT the Hang Seng Index  was uop 0.87% with Shanghai down 0.39%
  • The Mumbai Sensex was trading slightly higher, up 0.09% at 0507 GMT
  • The S&P/ASX200 was trading up 0.59% at 0609 GMT

Forex ahead

  • The yen rose against its FX counterparts, adding to headaches for policymakers in Tokyo
  • The US dollar was worth just ¥100.8890 at 0156 GMT
  • AUDUSD slides after S&P downgrade for 70 pips fall before recovering to 0.75 area
  • EURGBP resistance cementing around the 0.84 area

From the Floor

Twisted story. "The very strong ISM non-manufacturing print doesn't really fit the narrative of the post-Brexit world and a strong NFP would also mirror this", says Hardy.

Banking gloom. "Watch the banks — if they turn around, it might change positions intraday", says Garnry.

Get all the latest from Saxo Bank's trading floors in From the Floor, within the hour.

In opinion

Today's ADP data on US jobs will influence expectations about the official nonfarm employment report that is due to be released on Friday, says James Picerno

Brexit fever is alive and well in the UK property funds market - some funds have frozen withdrawals as investors exit en masse, reports Saxo's Asia team

Historic pounding
The last time the pound hit such a low point, former US president Ronald Reagan and UK prime minister Margaret Thatcher were both in office, writes Clare MacCarthy in this insightful infographic.

Tories' timely tactic
Warnings of a Brexit fallout are proving correct, and the next Tory leader may try to postpone the EU exit or even avoid leaving it altogether, says Luis Cabral in this article from CNBC.

Bigger than Brexit
Europe may not need more uncertainty post-Brexit, but Italy's feeble banking sector and the South's woes in general are providing exactly that, writes Stephen Pope.

RInse and repeat
The May nonfarm payrolls print was a huge disappointment, but those hoping for a rebound in June might be disappointed and that could spell recession, says Steen Jakobsen. [video]

Crude weakness
WTI crude is sliding towards the $45/barrel mark and there will be a lot of attention late afternoon on gasoline stocks when the EIA makes its weekly release, says Ole Hansen.

Eyeing equities
The recent rout in European equities has created a plethora of high-dividend yielding stocks, but, while an opportunity, it must be played wisely, says Peter Garnry.

In the diary
Just what is an ordinary trading day and how far can we assess a market? TradingFloor community stalwart fxtime breaks it down by the hour.


 The sterling crisis gives the Bank of England much to mull over. Photo: iStock

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