Cable

The EU granted the UK’s flextension until 31st October, four-month longer than PM May requested. Yet whilst today’s ‘meh’ reaction points towards Brexit fatigue, the coiling nature of GBP suggests volatility could be brewing.

Since last night’s FOMC meeting, we have had two other major central bank rate decisions and some key data as well. But there is one last major central bank policy decision still to come in less than an hour’s time: The Bank of England.

After a sharp two week sell-off, the GBP/USD has reached and reacted from a key technical support area today.

Despite news that the UK inflation climbed its highest rate since March 2012, the GBP/USD initially dropped to its lowest level since 28th November, underscoring investors’ scepticism over last week’s Brexit deal, before bouncing back.

Could we see a more hawkish Bank of England on Thursday? Surely the Monetary Policy Committee cannot justify keeping interest rates at the current record low level of 0.25% for too long after CPI inflation accelerated to 2.9% y/y in August, driven by a record rise in clothing and footwear.

Equity markets rallied back on Monday and safe-haven demand took a downturn as Hurricane Irma abated and North Korea refrained from conducting more missile tests (for the time being). The US dollar found a bit of footing as it rebounded after having dropped to a multi-year low against a basket of other major currencies late last week. Meanwhile, the British pound managed to stay well-supported in the run-up to a week featuring major economic data releases and a key central bank decision from the UK.

The Bank of England has left interest rates unchanged with only two of its MPC members voting in favour of a hike this month.

If the dollar were to head further lower, then the GBP/USD could be the next pair to rally given that all the other dollar crosses have had their fair share of the fun already, except sterling. Supporting this view, data from the UK hasn’t been bad this week...

In a historic moment today, Theresa May has delivered the UK exit letter to her European Union colleagues, officially starting the Brexit process today. With so much uncertainty hanging over the UK economy, it is logical to think that the pound could remain under pressure...

The GBP/USD has hit a fresh post-FOMC high this afternoon. Like the Bank of Japan and Swiss National Bank, the Bank of England decided to keep its monetary policy unchanged. BUT it wasn't a unanimous decision as Kristin Forbes voted for a 25 basis point rise amid concerns over inflation. This caused the pound to jump across the board.

Something odd is happening this morning. Both the pound and the FTSE are higher. The two assets have had a strong negative correlation for several months. The relationship made sense: a stronger pound is not meant to be positive for UK stocks as it could hurt exports and thus profitability. So the theory goes. In practice, it is not as simple as that...

The greenback has got a little bit stronger and the Dollar Index is again trying to form a base around that 100 level. It looks like the EUR/USD’s rally has run out of juice, the USD/JPY has bounced back and now the cable could be the next domino to fall.

UK Prime Minister Theresa May’s comments about how the UK will leave the EU were well-received by traders yesterday as she confirmed that Parliament will debate the final Brexit deal. As a result, the GBP/USD had its best day since 2008 as it surged from around 1.20 to 1.24 in a matter of hours. But the cable has eased back somewhat sharply in the first half of today’s session despite news of stronger UK jobs and wages data and yesterday’s stronger CPI print.

Well, not quite. It is more complicated than that, but bear with me I will explain.

The GBP/USD has finally found some support today, though it is too early to say whether the selling pressure is over just yet. There hasn’t been any real news out to support the pound. If anything, news out of the UK has been actually bearish. For example, a survey of 100 business leaders by accountancy firm KPMG has shown that the vast majority would consider moving their headquarters or operations outside Britain due to Brexit. So the GBP/USD’s slight improvement could just be a case of short-covering, supported further by the fact that the dollar has sold off more than the pound today with EUR/USD also rallying and USD/JPY falling back below 100.30. Indeed, the GBP/JPY is actually trading lower, while the EUR/GBP is higher, though both are off their extreme levels. Thus, at this stage there is no real evidence that the pound is catching a bid. However, that could change as sterling has reached some key levels against its main rivals.

Key economic data releases this week out of the UK in the run-up to Thursday’s Bank of England (BoE) rate decision have been lackluster, but the widespread expectation continues to be that the central bank will hold rates steady after cutting by 25 basis points last month to a record low 0.25% on post-Brexit economic concerns.

A trio of significantly better-than-expected purchasing managers’ index (PMI) readings out of the UK late last week and on Monday came in quick succession. Manufacturing PMI for August came in at a 53.3 expansion level against prior expectations of a 49.1 contraction. Construction PMI was still in contraction at 49.2, but better than the 46.6 expected. Finally, Monday’s services PMI showed a 52.9 expansion versus the 49.1 contraction forecast. Overall, PMI readings are a major indicator of economic health, and these positive UK results help support the notion that the consequences of June’s Brexit vote could have a much smaller adverse impact on the UK economy than previously anticipated.

The recent improvement in UK data has seen many investors and analysts, ourselves included, ask a rhetorical question with a hint of sarcasm “Brexit, what Brexit?” Traders have apparently reduced their net short positions from record high levels as they realised the fallout in the immediate aftermath of Brexit was not as bad as many had feared. Granted, not all the economic pointers have been great but on the whole July has been a good month for the UK economy. However, we don’t want to jump into any conclusions as the economy works at a much slower pace than the markets. T

The GBP/USD ended higher last week on the back of surprisingly stronger-than-expected UK economic data and as the dollar eased along with expectations about an imminent rate hike in the US. But the Cable did sell off heavily on Friday, which took some shine off the week’s rally.

The UK inflation figures were stronger than anticipated, with headline CPI rising at a 0.6% rate rather than 0.5% that had been widely expected. The impact of Brexit was very clear as a significantly weaker pound caused the price of goods and raw materials purchased by manufacturers to soar.

Unless you’ve been living under a rock, you know that GBP/USD has been in freefall over the last several weeks amidst fears of a potential “Brexit” (UK exit from the European Union) come June. But in the current short-attention-span/24-hour news cycle/twitter zeitgeist, it’s easy to lose sight of the truly long-term picture.