GBPUSD – Test of 1.3600 Coming?

GBPUSD – Test of 1.3600 Coming?

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Cable popped in late London trade on reports from the Independent that EU and UK have agreed to a Brexit divorce bill. While no details were given, the news if confirmed is the first bright spot in Brexit negotiations for PM Theresa May and suggests that two parties may be finally reaching some key compromises on the issues.

Still, Brexit talks face an uphill test, especially given the key negotiating deadline of December 4th next week, and unless UK can offer palatable solutions on both the Northern Ireland border issue and on freedom of movement concerns, today enthusiasm may evaporate and GBPUSD could tumble towards 1.3000 once again.

On the other hand, if this is the first step to a serious Brexit agreement, the upsurge in cable could continue unabated for much longer than anyone imagines and the pair could challenge 1.3600 before year end.

GBP/USD Breakout Coming

GBP/USD Breakout Coming

Chart Of The Day

GBP/USD Breakout Coming

After consolidating for the past week, GBP/USD is gunning for a breakout and we think the break could be to the upside. The U.S. dollar is extremely overbought and prime for profit taking ahead of this week’s U.S. non-farm payrolls report. Meanwhile UK Chancellor Hammond announced more borrowing and a new National Productivity Investment Fund of 23 billion pounds aimed at infrastructure spending. This announcement caught the market by surprise and sent sterling sharply higher versus the euro and if the dollar pulls back next week as well, it will benefit GBP/USD. U.K. PMI manufacturing numbers are scheduled for release next week and we think they will be strong providing support for our case that a GBP/USD breakout could be to the upside.

Technically, GBP/USD is trading in an extremely narrow range between the 20 and 50-day SMA. These moving averages along with the edges of the triangle that we have drawn are the references for a breakout. If GBP/USD rises above 1.2525, it should be headed above 1.26. If it breaks below 1.2350 maybe even 1.24, it is headed towards 1.22.

USD/JPY – Dip Buying Opportunity Coming!

USD/JPY – Dip Buying Opportunity Coming!

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The losses in USD/JPY today tell us that the primary theme of trade was risk aversion. U.S. stocks fell sharply and the deterioration in risk appetite was driven by renewed concerns about the impact of Fed tightening. If the doves (Lockhart and Yellen) are saying that rates could be increased as early as October, then there really could be a strong motivation within the central bank to raise rates in 2015. Their decision to delay this month could be just that – a one to three month wait for more confirmation. The widespread gains in the U.S. dollar confirm that rate hike expectations are a big driver of today’s move in currencies and if the Fed follows through with raising rates we could see a renewed rally in the dollar. In fact we wouldn’t need to wait for the actual rate decision – the greenback could move higher if the chorus of Fed officials coming out to talk about 2015 tightening grows. We have long been bullish dollars and continue to view a dip in the currency as a buying opportunity. Meanwhile the recent strength of the Yen will only make life more difficult in Japan. With the stimulative impact of Abenomics beginning to fade, the recovery is slowing. Tonight’s PMI manufacturing index is expected to show a slowdown in manufacturing activity while Thursday’s consumer price report could show core inflation turning negative for the first time in 2.5 years. Combine that with the recent downgrade by S&P and we see the Yen losing its luster.

Technically USD/JPY is still trading in a tight range with support at 118.25 and resistance at 121.75. However a consolidative triangle pattern is forming in the currency pair, which suggests that a breakout is coming. With no major U.S. data, it is unlikely to happen this week and therefore we view buying USD/JPY towards the bottom of the triangle near 119.25 as an attractive trade for a move back to 121.

EUR/CHF – Is Intervention Coming?

EUR/CHF – Is Intervention Coming?

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Fundamentals

EUR/CHF hit a 2 year low today as investors fear that a yes vote on the Swiss gold referendum at the end of the month will force the Swiss National Bank to choose between adhering to the vote or defending the EUR/CHF 1.20 peg. The vote asks whether the SNB should raise the share of gold in its asset to 20% from 8%. The reason why this could affect the currency is because if the referendum passes, it would require the central bank to sell its foreign reserves, much of them in euros to buy gold. This is a dangerous predicament because it would restrict the SNB’s ability to defend its currency. The vote will be a close one that gold bugs and EUR/CHF traders will watch carefully. However while it poses a serious risk to EUR/CHF, the vote is more than 2 weeks away and the SNB could still verbally and possibly even physically intervene in the currency to keep it from breaking the 1.20 peg before that time.

Technicals

In a pair like EUR/CHF that is distorted by central bank intervention, technicals are not very reliable. However as shown in the daily chart, 1.20 is an obvious support level for the currency pair. In the last 2 years, the “low” for EUR/CHF was 1.1996, a level that we believe will hold before November 30th. While there appears to be resistance at 1.21, verbal and/or physical intervention could drive EUR/CHF up 100 to 300 pips in a matter of days depending the strength of the central bank’s actions.