The Road Ahead Remains Uncertain for the Pound

Another difficult day in parliament for Boris Johnson yesterday, losing a further two votes. Parliament has rejected Prime Minister Boris Johnson's bill for an early election. Only 298 MPs voted in favour of an election, 136 short of the two-thirds majority needed to carry the Government motion, after all but three Labour MPs either abstained or voted against it. Opposition lawmakers first want to complete the legislation blocking a no-deal Brexit which has successfully passed in both the House of Commons and the House of Lords. As such, while this has seen a no-deal Brexit threat edge lower, the road ahead remains an uncertain one for the Pound.

The latest Markit IHS PMIs highlight the effect that Brexit is having on the UK economy with the dominant services sector this year reporting ‘its worst performance since 2008, with worrying weakness seen across sectors such as transport, financial services, hotels and restaurants and business-to-business services’, according to Chris Williamson, chief business economist at IHS Markit.

The index fell to 50.6 in August from 51.4 in July, signalling only marginal expansion with Markit suggesting that UK Q3 GDP will contract by 0.1%.

GBP/USD

The GBP/USD pair added to the previous session's strong rebound of around 150-pips and easily surpassed the 1.2200 handle yesterday. The positive momentum seemed unaffected by the disappointing release of UK services PMI, rather took cues from a follow-through US Dollar selling bias. Given that investors have started pricing in prospects of an aggressive Fed policy easing at the upcoming meeting in September, the USD extended its pullback from multi-year tops and remained supportive of the pair's ongoing strong positive move.

A sustained break through the mentioned barrier might trigger a fresh leg of a short-covering move and might now assist the pair to conquer the 1.2300 round figure mark. The momentum could further get extended towards the 1.2370-75 intermediate resistance before the pair eventually aims to reclaim the 1.2400 handle.

On the flip side, the 1.2200 mark now seems to protect the immediate downside and is closely followed by support near the 1.2175-70 region, which if broken decisively – though seems unlikely - might trigger some technical selling and accelerate the fall back towards the 1.2100 round figure.

GBP/EUR

Despite the significant developments Sterling volatility has died down, with the currency extending its rally against the Euro to trigger a high at 1.1108. This is its highest level since July 29 and will provide some welcome relief to those looking to exchange their pounds for euros. With the recovery eyeing new levels of 1.1039 support and resistance at 1.1139.

EUR/USD

Better than expected Eurozone services PMI data has helped the Euro recover, which in turn has reclaimed the 1.1000 handle. Alongside this, the Euro had been further boosted by the ECB President nominee, Christine Lagarde, who stated that the ECB must be mindful about negative effects of unconventional polices, suggesting that the next ECB President may not be major advocate of significant policy stimulus. However, despite an impressive recovery, doubts about its sustainability are creeping in.

US trade representative Robert Lighthizer and treasury secretary Steven Mnuchin have spoken with Chinese Vice Premier Liu He on the phone and discussed resuming face-to-face meetings. Hopes for fresh US-Sino trade talks support the dollar.  

Fresh data coming out of Germany this morning has also contributed to halting the euro's rise. Factory orders plunged by 5.6% in July – far worse than 1.1% expected. While the data set is volatile – it is another important warning sign for the euro zone's locomotive. The European Central Bank convenes in one week, and pressure to inject significant stimulus is rising.

Today, traders will be eager to see the publication of US consumption and income data. Considering almost 80 percent of the economy is powered by consumers, it is no wonder economists and analysts will be following this indicator closely. Investors will also be keen to see the publication of the PCE deflator, the Fed’s favoured inflation gauge and a barometer of progress toward meeting its statutory mandate. A poor reading out of this particular data point may fuel what are already-aggressive rate cut expectations from the Fed. The central bank’s position for months has been that despite the outlook “deteriorating” – to quote Jerome Powell at the Jackson Hole symposium – the Fed is still data dependent.

Support awaits at the psychologically important 1.1000 level. While, immediate resistance awaits at the daily high of 1.1040.

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