The pound came under strong selling interest yesterday and what lit the wick in our view may have been comments by former Justice Minister David Gauke that he doesn’t know whether efforts to block a no-deal Brexit will gather majority in Parliament. In Australia, the RBA kept interest rates unchanged as was widely expected, and reiterated its “if needed” language, which suggests to us that policymakers may decide to wait until November before pushing the cut button again.
Pound Falls Off the Cliff on Political Turmoil
The pound tumbled against all the other G10 currencies yesterday. It fell the most against USD, NOK and JPY in that order, while it underperformed the least versus AUD, EUR and NZD.
For the umpteenth time, the British currency was a victim of the uncertainty surrounding the UK political scene, and especially the Brexit sequel. While media attribute the tumble to general election speculation, we will have to disagree. After all, the likelihood of an election reduces somewhat the risk of a no-deal Brexit, as it opens the door to a new government, which may not be as hard as PM Johnson is on Brexit. Remember that he has pledged to leave the EU by October 31 st, with or without a deal, and his decision to suspend Parliament in mid-September for around a month, suggests that he is very willing to pull the plug if no satisfying accord is found. Actually, at the first headline pointing towards Johnson calling an election, the pound bounced somewhat, before coming back under selling interest.
In our view, what lit the wick of the pound’s free fall may have been remarks by former Justice Minister David Gauke, who said that he doesn’t know whether MPs will have majority to block a no-deal Brexit. Remember that Parliament returns from its summer recess today, and with a suspension looming in a few days, Gauke’s remarks may have raised fears that lawmakers will not succeed in stopping a chaotic divorce with the EU. They will put forward a vote today on whether to take control of the parliamentary Order Paper tomorrow in order to pass a legislation that requires the Prime Minister to ask for a 3-month Brexit delay.
But, after he threatened to throw out of the party any members that go against him, PM Johnson said that there are no circumstances in which he will ask for a delay. The government holds a majority of just one, and Johnson’s willingness to expel Tories that oppose him will result in a minority government. That’s why he may call for a vote on holding an election on October 14 thif he is defeated on Wednesday. As we already noted, elections lessen the probability for a no-deal divorce, but voting for one before a delay is secured gives very little time for a potential new government to find a solution in averting a chaotic Brexit. Maybe that’s the reason the pound’s bounce on the first election rumor did not last for long.
GBP/CHF — Technical Outlook
GBP/CHF continues to trade below its medium-term downside resistance line taken from the high of May 28 th. Recently, the pair was spotted moving sideways, roughly between the 1.1935 and 1.2080 levels. At the time of writing, it is balancing just slightly above the lower side of that range. Although there is a chance for the rate to move further south, given the events that are planned for today in the British Parliament, we will take a more cautious approach and monitor some of our key support and resistance levels instead.
A drop below the 1.1935 hurdle, which is the lower side of the above-mentioned range, could spark more interest among sellers and the rate may slide to the 1.1871 obstacle, which is the low of August 21 st. The pair could stall there for a bit, or even correct back up slightly. But if it stays below the 1.1935 zone, this could initiate another round of selling, potentially bringing AUD/USD below the 1.1871 mark and aiming for the 1.1818 level. That levels acted as a strong support on August 20 th.
On the upside, if the rate remains above the previously discussed 1.1935 hurdle, this would keep us side-lined for a while, especially if the pair struggles to move above the downside resistance line. But if that line breaks and AUD/USD climbs above the 1.2080 barrier, which is the upper side of the range, this could attract more buyers and the pair could get a push towards the 1.2126 area. That area was seen as a good resistance on July 31 st. If the buying doesn’t end there, a further push north, above the 1.2126 area, might send the rate all the way to the 1.2224 level, marked by the lows of July 22 ndand 23 rd.
RBA Stands Pat, Maintains the “if needed” Language
Flying from the UK to Australia, a few hours ago, the RBA announced its monetary policy decision. The Bank decided to keep interest rates unchanged at the record low of +1.00% as was broadly anticipated, and reiterated that they will continue to monitor developments, including in the labour market, and ease monetary policy further “if needed”.
Remember that ahead of the meeting, there was only a 10% chance for a cut today, a 72% probability for that to happen in October, while a 25bps decrease was more-than-fully priced in for November. In our view, keeping the “if needed” part within the statement lessens the chance for an October move, and makes November an even-more likely candidate. Maybe that was the market’s view also, as the Aussie spiked up 20 pips at the time of the release and continued to drift somewhat higher thereafter.
Having said that though, we prefer to closely monitor upcoming Australian data before we arrive to safer conclusions over when policymakers may decide to push the cut button, as well as developments surrounding the US-China trade sequel. Remember that Australia is one of China’s main trading partners and how the saga unfolds affects the Aussie and the RBA’s decisions. On Sunday, both the US and China proceeded with a new round of tariffs as expected, and despite last week’s relatively optimistic remarks with regards to negotiations, further escalation cannot be ruled out yet in our view. Something like that could bring the Aussie under renewed selling interest.
On the data front, focus for Aussie traders will now shift to Australia’s GDP for Q2, which is released tomorrow, during the Asian morning. Expectations are for the qoq rate to have ticked up to +0.5% from +0.4%, something that will drive the yoy rate down to +1.4% from +1.8%. Although the qoq rate would move in the desired direction, a yearly rate of +1.4% would be below the RBA’s latest projection for the quarter, which is at +1.7%. Thus, market participants may be tempted to bring back on the table some of the October cut bets they removed today, which could thereby hurt the Aussie.
AUD/USD — Technical Outlook
Once again, after finding good support near the 0.6689 hurdle, AUD/USD is trying to get back up. This morning we are seeing a strong rebound from that hurdle, which may give some hope for the bulls to lift the rate a bit higher. That said, the pair has some strong obstacles on its way higher, one of which is the short-term downside resistance line taken from the high of August 8 th. For now, there is a chance to see AUD/USD climbing back up a bit, but as long as it stays below the aforementioned downside line, we will stay somewhat bearish over the near term.
As mentioned above, a push higher and a break through the 0.6710 obstacle, might bring the pair to its next possible resistance zone between the 0.6740 and 0.6753 levels, marked by the highs of August 30 thand 29 threspectively. AUD/USD might get a hold-up around there, and if so, the bears could see this as a good opportunity to step in and drive the pair lower again. This when we will target the recently tested support area, at 0.6689, which could help keep the rate up. But if it fails to do that, slightly below it sits another possible support level, at 0.6677, which is the lowest point of August.
Alternatively, if AUD/USD breaks the previously-discussed downside resistance line, this may attract more bulls into the field and the pair might get pushed to the 0.6790 barrier, which kept the rate down from August 15 thuntil the 26 th. If the bulls have enough strength to lift the pair above that barrier, this is when we could turn slightly more positive about higher levels, at least in the short run. The next possible resistance area could be seen around the 0.6820 hurdle, or near the 0.6830 obstacle, marked near the high of August 8 thand near the low of July 31 strespectively.
As for the Rest of Today’s Events
During the European day, we get the UK construction PMI for August, which is anticipated to have risen to 45.9 from 45.3. However, bearing in mind that the manufacturing index, released yesterday slid to 47.4 from 48.0, instead of rising to 48.4 as the consensus suggested, we see the risks surrounding the construction forecast as tilted to the downside. In any case, we expect UK data to pass unnoticed this week, as investors keep their gaze locked on developments surrounding the political landscape.
From the US, we get the final Markit manufacturing PMI for August, which is expected to confirm its preliminary print, as well as the ISM manufacturing index, which is forecast to have ticked down to 51.1 from 51.2.
As for tonight, during the Asian morning Wednesday, apart from Australia’s GDP for Q2, we also get China’s Caixin services PMI for August, but no forecast is currently available. We also have two speakers tonight: Boston Fed President Eric Rosengren and BoJ Board member Goushi Kataoka.
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Originally published at https://www.jfdbank.com on September 3, 2019.