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Brexit status: … it’s complicated

It is widely agreed that the pound sterling volatility remains closely linked to the developments on the Brexit front. Recently, events have escalated when British Prime Minister Boris Johnson successfully prorogued Parliament (shut down). The Queen approved the suspension which is supposed to happen between 9th and 12th of September.

Knowing they only have a small window of opportunity to react before the scheduled recess, UK Parliament returned on Tuesday ramping up efforts to block a no-deal Brexit amid talks of a no-confidence vote. In the process, they’ve been trying to extend the October 31st deadline. To complicate matters further, PM Johnson’s government lost their slim majority in Parliament when Philip Lee left his party to join the Liberal Democrats.

Unsurprisingly, Labour and Tory rebel MPs joined hands and voted on a bill which ceded control of the Brexit timetable back to the House of Commons’ now dominated by Remainers. Boris Johnson was quick to react and said the current position does not allow him to negotiate with EU leaders. After all what chances would one have in successfully negotiating a good deal if the other side knows a ‘no-deal’ is off the table? Would they make any compromise? Why would they?

So, as things stand, it seems we’re heading for another election? Not that easy. Yes, PM Johnson promised to forward a motion calling for a snap general election on 14th of October but he would need two-thirds of MPs to back his motion. If not, he needs to find another way, such as calling for a motion of no confidence in himself… If successful, this would be the third time that a vote, somehow linked to Brexit, has been put to the people, in less than 4 years. Of course, some would find it outrageous to deny the country an election, given Labour and/or Remainers calls for a second referendum.

On another note, UK consumer confidence took a hit to a six-year low, the data revealed last week. Again, the prospect of a ‘no deal’ Brexit was blamed as the culprit for negative outlook in households’ finances.

It is true to say that Brexit remains a complicated affair! We’re no closer now to settle the issue, after more than 3 years since the referendum. From the EU side, the chances of them stepping in and saying yay or nay are very slim. EU seem perfectly happy to watch UK politicians cannibalising themselves.  They will be hoping the subject will drag on long enough to drain the last bit of energy out of everyone involved until, out of exhaustion, the whole idea will be abandoned.

Let’s see what the GBPUSD chart is telling us.

The long-term trend is intact, pointing to the downside.

Bearish scenario:

Since end of July we could see consolidation forming. After touching a recent low of 1.2014 on August 12 the GBPUSD rebounded nicely to 1.23 and it seemed the turnaround could be underway as shown by the red trendline. But then bears got back in control and the downtrend resumed. The price crossed below the 9 and 21-day moving averages giving the bearish signal. Additionally, the 9-day MA moved below 21-day MA, raising further alarm bells.

What’s more, yesterday support around 1.2014 mark, last touched on August 12, was broken. It continued to drop, stopping just above 1.1950 level which acted as support at the end of 2016. It closed the day on a strong note so the sell-off was not confirmed, but any fresh dips below 1.20 could firmly re-establish bears’ control of the long-term trend.

Bullish scenario:

Yesterday low (1.1957) was again good support, attracting enough buyers to trigger a push back up. The immediate question for the bulls is whether resistance at 1.2180 can be successfully broken (confirmed by a close above it). That’s where the moving averages seem to converge and a daily cross above them would offer further hopes to buyers.

But to talk about a bullish short-term trend the price needs to break above 1.2295. Next resistance can be seen at 1.2390. If that fails to happen then it’s consolidation between 1.1957 and 1.23.

Further consolidation for the Canadian dollar?

The Canadian dollar is the fifth most widely held reserve currency behind the US dollar, the yen, the euro and the British sterling. At the same time, Canada is the tenth largest economy in the world with a gross domestic product of $1.8 trillion. Being a relatively safe country with a stable legal system and matured political class, its currency accounts for about 2% of global foreign exchange reserves.

Also known as the loonie (named after the bird which appears on the one dollar bill), the Canadian dollar is part of the so called ‘commodity currencies’. In the same group is the Australian dollar, the Norwegian krone and to a lesser extent, in terms of demand, the Chilean peso. The reason for that is the bulk of Canadian economy is linked to the production of commodities like oils and gas, mining metals or agriculture.

Consequently, the Canadian dollar tends to rise when the commodity markets are rising and decline when they are weakening. The commodities super-cycle which started around the turn of the millennium is testimony to that. For example, when oil prices went to a low-double-digits ($10-$12 a barrel) gold was below $300 per troy ounce and grains were also very cheap, the Canadian dollar moved below $0.65.

But conversely when crude oil prices made a record high of $147 a barrel in 2007, the loonie went briefly above parity to the US dollar to a high of $1.10. No later than 2010, the Canadian dollar was still valued at $1.05. Since then the trend has been steadily downwards and today the loonie is worth around $0.75.

As central bankers around the world are now on track for further monetary easing, so the Bank of Canada is expected to follow in the footsteps of the US Federal Reserve’ latest cut. However, the latest inflation figures in Canada surprised on the upside, coming in at +0.5% month on months versus expectations of a rise of just 0.1%. On top of that, last Friday core retail sales data showed an increase of 0.9% against consensus for a decline of 0.1% month on month.

The growing US – China trade disputes are likely to weigh on the global economy outlook which in turn might keep demand for fossil fuels largely subdued. And that does not bode well for the commodity currencies at least on the short term. However foreign exchange is a relative game. Could it come down who cuts the interest rates faster and stronger? It remains to be seen.

The USDCAD pair has reached a recent high of 1.4688 at the beginning of 2016 as the chart shows (which corresponds to the low in the Canadian dollar) and a low of 1.2060 on September 2017 (high in $ CAD).

Bearish scenario (for the Canadian dollar)

We need to see the USDCAD going higher. The chart shows the recent trend to be sideways for the past 15 moths ranging between 1.2770 and 1.3670. The next resistance can be seen at 1.3350 followed by 1.3440 and 1.3530. Encouraging for that, the price is now above the 9 and 21 week moving averages. But ultimately a move above 1.3670 will confirm the re establishment of the uptrend.

Bullish scenario (for the Canadian dollar)

However, the 9 week moving averages crossed below the 21 week moving averages in the second half of June this year thus giving the sell signal for the USDCAD. If that was to happen, the next support will be just above 1.32 followed by 1.3050.

What’s new in the land of OZ?

Australia is the world’s 13th largest economy, valued at around A$ 1.9 trillion (or equivalent of $1.3 trillion). However the country’s currency, the Australian dollar, is punching above its weight being the fifth most traded behind the US dollar, the euro, the Japanese yen and the British pound sterling. At the same time the Aussie dollar is the sixth most widely held currency, accounting for just shy of 2% of global foreign exchange reserves.

There are a few reasons why the Aussie dollar is in high demand relative to the size of its economy:

  • Strong rule of law, relatively stable political arena enjoying, by and large, a free exchange rate mechanism
  • In comparison to the US, the EU and Japan it had quite high interest rates especially during the last decade. It was the only developed economy which did not struggle during the recession of 10-12 years ago. As an example, interest rates in Australia were at around 5% in the aftermath, when in Europe and the US they were pretty much zero. Consequently, it benefited from extra demand brought on by the so-called carry trade – borrowing in low yielding currencies to buy into high yielding ones and pocket the difference (assuming relative stable exchange rate between the two categories)
  • Another solid support was brought on by its high correlation to commodity prices and exposure to the fast-growing Asian economies. Australia is a major producer and exporter of iron ore, copper, coal, gold, silver and uranium all in high demand at the turn of the century

Nonetheless, being linked to these commodities was also its weakest spot as that asset class is notoriously cyclical. After reaching a top in 2011 (see gold high of over $1900) commodities have been on a downtrend since, taking the Aussie dollar south with them. Interest rates have also been dropped in June and July 2019 and now reached a record low of 1%. Back then the AUDUSD was trading around 1.10 whereas now is just below 0.68. In addition, Australia is facing a bursting bubble in the property market coupled with sluggish household consumption. Talking about a downward spiral.

Recently, in line with the majority of central bankers around the world (soon to be all of them probably), the Reserve Bank of Australia has been looking to ease the monetary policy. So much so that the minutes of the last meeting on August 6th showed the RBA board discussing unconventional monetary policies including negative interest rates to spur growth and achieve its 2% to 3% inflation target. Markets are pricing in another rate cut to 0.75% by the end of the year and another one to 0.5% by February 2020.

The minutes showed ‘that a package of measures tended to be more effective than measures implemented in isolation’ according to board members and the US-China trade dispute increased the risk to global economic growth as business had already significantly cut back investment plans.

Bearish outlook
The AUDUSD has reached a top of 1.1080 in July 2011 which pretty much coincides with the peak of commodities cycle. Since then it has been in a secular bearish trend. A string of lower lows and lower highs clearly point to that with the market price now below the 9 and 21-week moving averages.

The downtrend was signalled initially by the 9-week moving averages (red line) crossing below the 21-week moving averages (blue line) seen in May 2013. However, since early 2015 until recently, we can see the AUDUSD trading sideways largely between 0.67 and 0.81.

But the downtrend resumed earlier this month with a drop below 0.67 to a low of 0.6676. An early signal was represented by 9-week moving averages again dropping below the 21-week moving averages and until that changes, ‘the trend is our friend’. Still, the bears will want confirmation and if this month brings a close below 0.67 they will be looking to run positions to next support around 0.6250 followed by the low of 0.6008 seen in October 2008.

Bullish outlook
If the downtrend is not confirmed and proves to be just a false breakout, the bulls will be looking for a rally back to 0.72 which is also a 23.6% Fibonacci retracement. Further resistance can be seen just above 0.73 as well as around 0.75 level.

This scenario will mean either a fortune reversal for the Aussie dollar (sudden healing of the housing issue and/or the slump in consumption) or the US dollar eventually weakens cheering President Trump. Although either scenario is possible, it looks to be a big ask in the short term unless the Fed starts to cut rates aggressively.

The new tariffs on China delayed

We had two important developments this week making headlines around the globe.

Firstly, bowing to pressure from concerned business leaders (according to Bloomberg), the US President Donald Trump delayed tariffs imposed on certain Chinese imports until December 15th this year. The decision (on Tuesday) sparked a relief rally in global stocks, after heavy selling seen on the previous session.

However, that was short lived as Wednesday, the markets were rattled again when the yield on the benchmark 10 year US Treasury note was at 1.623%, moving below the 2 year yield at 1.634%.

Why is that important? Because it has been a reliable, yet sometimes early, indicator for economic recessions over the past 50 years. Credit Suisse reported that when the inversion occurs a recession follows on average within 22 months. But they also included some positive news. The same report shows the S&P 500 is up, on average, 12% per year, from the time of inversion until the recession kicks in!!! (could the market be the final last gasp upsurge, the last bit of a price rally before collapse?)

Meanwhile, China’s National Bureau of Statistics reported the economy is growing at a stable pace and the reason for a slowdown in retail sales in July was weaker auto sales. It added that consumption has huge potential with employment also as expected. Nonetheless July industrial production was +4.8% year on year, versus expectation of +6.0%, the slowest growth rate since February 2002.

In the UK, there is now speculation that a general election could be on the cards. Britain leaving the European Union on Oct 31, deal or no-deal, does not seem to satisfy the opposition MPs as well as a good chunk of Conservatives. So much so that Prime Minister Boris Johnson accused the rebels from both parties of conspiring with Brussels. The ongoing political uncertainty has kept the GBPUSD under heavy downside pressure touching a low of 1.2014 on Monday.

Meanwhile the German economy, EU’s biggest, saw a slump in the second quarter GDP (albeit small one of 0.1%) which puts increasing pressure on Chancellor Angela Merkel to kickstart fiscal stimulus. It seems the US-China dispute has a heightened negative effect on the nations relying heavily on their manufacturing base. According to European Central Bank exports of goods and services accounted to 28% of the EU GDP in 2017 compared to only 12% for the US.

Could events in Italy put downward pressure on the EURUSD?

The EURUSD is the most traded foreign exchange pair in the world. The common currency, as the euro is also known, is the official money in 19 of the 28 European Union member states. At the same time, it is also official money in smaller states like Monaco or Vatican City which are not EU members. Additionally, some countries, whilst having their own money, have currencies pegged to the euro i.e. Denmark, Bulgaria or some African nations like Morocco, Ivory Coast, Congo. However, the euro has only been in existence for roughly 20 years. Yes, there was agreement in 1995 about the setup, but officially it became an account currency in 1999. It started life on a back foot, quickly moving below $1 as for example someone would only need $0.85 to buy one euro in early 2000s.

In July 2008 the exchange rate was more than $1.60 for one euro, so it almost doubled in less than 10 years. The reason behind that impressive rally? By and large, it was perceived as a proxy for the Deutsche mark, Germany’s former currency. After reunification in 1990, Germany struggled economically for the best part of the next decade but then it made a comeback with a vengeance. Amid globalisation, Germany quickly became an industrial powerhouse, the engine driving the European manufacturing force. And of course, the euro strengthened with it.

Since 2008 though, the euro has been mostly on a downward slope against the US dollar and is now trading just below 1.12. First, we had the recession in the US which spread like wildfire and brought demand for the dollar as a safe haven currency (out of euros). That was followed by a shift from globalisation and free trade mindset to a more protectionist attitude among some of the developed world’s top politicians (if not in reality at least in rhetoric).

The euro got caught in the middle. On one hand, Germany is a country running a budget surplus and 40% of its economic growth is due to exports. On the other hand, struggling economies like Greece, Italy or Spain are running deficits. Their domestic troubles pushed the euro down which, from a monetary point of view, benefited exporting economies (the Netherlands, Germany). We know that a weaker currency is good for exports, but it also makes imports more expensive.

It easy now to see why some Eurosceptics are regarding the euro as ‘the worst of both worlds’. It is too strong for countries like Germany and the Netherlands, growing on steroids due to that ‘monetary unfair advantage’, whilst other countries like Spain, Italy or Greece feel the opposite effect due to the same process. That sparked a string of anti-euro politicians coming to power in Europe or threatening to do so. Recently, Italy’s leader Matteo Salvini triggered a government crisis in trying to push for fresh elections. His anti-Brussels views are well known.

Currently we are in the middle of a currency war where everyone wants to devalue its own money in order to get that bit of extra edge on its trade partners. Lowering the central bank interest rate is among the first measures taken so far in trying to achieve that. Going forward, the direction of EURUSD will probably be conditioned on those devaluation attempts, who’s going to do it more effectively?

The overall trend of EURUSD is down

As we mentioned earlier, it rallied to a high of 1.6038 seen on July 2008 but since then we saw a string of lower highs and lower lows. There are also a few counter-trend rallies which lasted for 12 to 18 months but the broader direction is clear – South.

Bearish outlook

The market price is below the 9- and 21-week moving averages. The 9-week MA (red line) has crossed below the 21-week MA (Blue line) in December 2017 and if history is any indication, that cross was a bearish signal. In the past (red circles) that happened in November 2008, March 2010, July 2011 and September 2014 and there were all reliable downtrend predictors. Next long-term support is around 1.0850 followed by record low of 1.034 seen on January 2017.

Bullish outlook

On the upside, we see resistance around 1.1550 which held well in the past (for 2 and a half year from February 2015 to July 2017) as well as resistance at 1.2050 and 1.2370. A cross above 1.237 would shift the medium-term trend to bullish.

The blue circles on our chart show the inflexion points when the counter trend rallies happened and could have been taken advantage of as they lasted more than 12 months.

A rally back to 1.167 which is 23.6% Fibonacci retracement from a high of 1.6038 to a low of 1.0340 should also be considered as a short-term possible scenario.

China’s counterpunching?

Gold prices continue to rally, moving above the psychological $ 1500.00 mark, as Sino-US disputes make the central bankers around the world rather edgy. A case in point, the New Zealand Central Bank cut its benchmark interest rate by 50 basis points from 1.5% to 1% versus expectations of only 25 basis points cut. The Reserve Bank of India and the Bank of Thailand followed suit. The precious metal reached $1510.00 although has since had a minor pullback on Friday morning, back below the $1500.00 mark.

China’s own currency, the onshore yuan fell to an 11year low, now costing more than 7 to buy one US dollar which indicates that the Chinese may not rush to support it any time soon, or at the least support it less than they have recently. The Trump administration was quick to label China ‘a currency manipulator’, leading to People’s Bank of China Governor Yi Gang saying his country ‘will not engage in competitive devaluation’ CNBC reports.

On the other hand, some analysts expressed views that allowing yuan’s freefall, Chinese government has in fact weaponized its currency as the trade war intensifies.

The US stock markets started the week on the back foot as Monday saw a selloff of more than 3% for each of Dow Jones, S&P and Nasdaq. Although a rally back was observed on Wednesday, it seems the US stocks are ending the week under renewed downward pressure.
Back in the UK the second quarter preliminary GDP figures showed a drop of 0.2% versus expectations for a flat result. In reaction to this first quarterly contraction since Q4 2012, the pound sterling fell below 1.21 vs the US Dollar. It seems that every central banker in the developed world is trying to devalue their respective currencies by slashing rates and/or other easing measures. But the Bank of England benefits from that, mainly on the Brexit saga and a slump in the GDP without much effort on their part elsewhere? Not bad.

ECB published the economic bulletin after its July policy meeting expressing concerns that the current climate of “prolonged uncertainty” is “dampening economic sentiment”. The manufacturing sector is one to keep an eye on. Market participants seem to anticipate weaker growth in the coming quarters, therefore leading to a potential restart of Quantitative Easing. Nonetheless, the EURUSD moved higher during the week hovering around 1.12 currently.

So, if the widespread consensus a few months back was that a deal between China and the US could be struck by the end of 2019, now that favourable outcome appears to be becoming increasingly doubtful.

China strikes back

Last week US President Donald Trump announced 10% tariffs on the remaining $300 billion of Chinese imports. The move came after the Federal Reserve was less dovish than Trump’s liking (judging by his tweets).
In reaction, China’s Yuan weakened to a record low against the US dollar, as more than seven yuan are needed now to buy one greenback. As a consequence, the US Treasury was quick to label China a ‘currency manipulator, devaluing the yuan while maintaining foreign exchange reserves, despite using such tools in the past’. Now, it is acknowledged that China’s currency does not float freely but is managed as a matter of policy. By and large it only fluctuates within a predefined channel.

Nonetheless there is a widespread opinion that China has in fact kept the yuan strong, in the past, for two main reasons. Firstly, if China wants to keep growing by exporting to the world (Belt and Road Initiative is testimony to that) they will want to make yuan part of global currency reserves club (up there with the US dollars, euros, yens, pounds and so on). One cannot do that with a shaky currency.
Secondly, China is, and has been, worried for a while about capital flights. At any sign of currency trouble, investors (foreign or domestic) could decide to take their cash out of China. So defending the yuan is a way to discourage capital outflows.

But in order to do that China needs to sell US dollars. Ok, it has a trillion dollars in reserves, but why squandering these reserves to prop up your own currency, in the middle of a trade dispute. Especially when the other side desperately wants a weaker currency themselves. Does that mean the trade dispute might take longer than initially expected? We shall see.
Interesting to note is that a devalued Chinese yuan could export deflation all over the world. And that’s the last thing the West needs amid low growth, low interest rates and ongoing weak inflation.

From the technical analysis point of view, the chart shows the overall trend in USDCNH is bullish.

We saw a sharp rise above psychologically important 7.0 mark recently. That level proved good resistance in December 2016 as well as October last year. It managed to break above the sideways range of 6.68 – 7.0 where it has been fluctuating since March 2018. So the uptrend remains intact.
The price now sits comfortably above the 9 week (red) and 21 week (green)moving averages so a retracement to resistance turned support of 7.0 could be considered. We note that the 9 week moving averages has crossed above the 21 week moving averages in May this year which, in hindsight, proved good buying signal for USDCNH pair. Interestingly these moving average crosses were effective signals, both in January 2019, when they gave an indication of a bearish move, and end of May 2018, a bullish trend (blue circles).

There are a string of lower supports, which proved good levels, at 6.90, 6.85, 6.79 and 6.68 shown by the red stripes. We note that support around 6.68 mark also represents 50% Fibonacci retracement from a high of 7.13 to a low of 6.24 (February 2018) alongside 6.79 as a 61.8% Fibonacci retracement.

The anatomy of a rate cut

Yesterday, the US Federal Reserve cut its benchmark interest rate by a quarter of percentage point to a range of 2%-2.25% which was the first cut since 2008. Usually, stock markets enjoy when the Fed slashes rates as easing means cheaper funds which at least partially will go back into stocks, propping up prices.

However, the outcome was a drop in US share prices coupled with a higher US dollar. One could easily think neither result was intended. That seems to be opposite to a logical intention because its rather hard to believe the Fed wanted a lower stock market and/or a stronger dollar at the present time. A stronger dollar makes it harder to pay down debt as well as hurting exporters in the current trade disputes. And a slumping stock market going into election is bad for politics. President Donald Trump has been tweeting continuously, bragging about the all-time highs in shares and at the same time ‘advising’ the Fed to take measures to weaken the US dollar.

So let’s see what happened in detail.

By and large the markets had been widely expecting a very dovish Fed which means a 25basis point cut accompanied by hints the second and eventually third cut will follow by the end of the year. But faced with a rather stronger than anticipated economic data lately, the Fed struggled to justify the decision going into the meeting. It blamed the US trade policy, slowing global growth and a lingering below target inflation. Many called it ‘an insurance cut’ reminiscent of ‘Greenspan put’ (a cut in interest rates done by the former Fed Chairman at the first sign the US economy went into troubles).

Nonetheless, during the press conference that follow the decision Fed Chair Jerome Powell described the cut as a ‘mid-cycle adjustment’ adding that ‘it was not the beginning of a long series of rate cuts’. The markets were shocked and interpreted the comments being rather on the hawkish side. After all they were widely expecting a dovish statement, betting on interest rates being pretty much a full percentage point lower in the next 12 months.

In reaction, the US dollar strengthened hitting a more than two year high and the Dow Jones fell 478 points initially. It closed the day 330 points down in its worst session since May.

Now we know that the midcycle adjustments down in 1995 and in 1998 were 75 basis points each (three cuts each). On the other hand, usually when the Fed starts cutting is not a one off move. Is Powell trying to say yes I’m going to make it easier for you markets but not that easy? So poor communication or not we might expect the next Fed decisions to be more data dependent.

The main trend Dow Jones according to the chart is down. The trend turned south mid July as we can see a string of lower highs and lower lows in a move that was exacerbated with yesterday’s big drop to 26,718. The price action needs to see a rise above high of 27,402.5 seen on July 15 for the long term trend to turn bullish again.

Bearish outlook

The next immediate support is around 26,720 which held its ground during the last test. A sustain move below that level will signal the growing presence of sellers and opened the door for a test of 26,640 where bulls and bears were at loggerheads in late June. If that level fails then look for selling pressure to test 26440.

Bullish outlook

A slight rebound is currently underway but it’s hardly bargain hunting feeling more like a dead cat bounce at the moment. We need to see at least a rise above 27,000, next resistance ( and 9 day moving average ) to indicate the presence of returning buyers. If the rally back then creates enough upside momentum investors could see the rebound extend to 27,078 and possible 27,157.

To be noted that yesterday violent nosedive took the price below both 9 and 21 days moving averages and in another bearish sign 9 day moving averages crossed below the 21 days moving averages.

Currency wars are back?

US President Donald Trump tweeted that China and Europe are manipulating their currencies to compete with USA and not to be left behind, Bank of England Governor Mark Carney also talked down the pound sterling. Federal Reserve Chair Powell’s testimony to Congress was seen as dovish, suggesting an interest rate cut in the US later this month is a done deal. And that would happen amid full employment, solid economic growth of 3% per year and S&P 500 reaching an all time high above 3000. All leads to the suspicion of a return to a currency war?

Gold remained above $1400 mark as Bloomberg reported that central banks buying in 2019 is on track for 700 tons, which represents an increase of 73% compared with last year. The main reasons were slowdown in economic growth, geopolitical tensions and trade disputes as well as attempts to diversify reserves from fiat currencies.  

China June Inflation data showed CPI at 2.7%, in line with expectations the lowest since August 2016, which could be problematic for industrial profits going forward.

In the US, FOMC June meeting minutes saw many Fed officials calling for a rate cut as a ‘cushion for shocks’ adding that inflation expectations were inconsistent with the 2% goal.

In UK, the pound fell below 1.25 to the dollar to a low of 1.2440, the weakest level since April 2017. The slump was based on the lingering Brexit uncertainty still weighing on the economy which is expected to contract in Q2, the first time in 7 years. UK Prime Minister contender Boris Johnson maintains that the country must be prepared to leave EU without a deal. On Friday GBPUSD rebounded slightly around 1.2550.

Meanwhile the former International Monetary Fund Chief Christine Lagarde is set to be confirmed as the new ECB President in October. At the same time European Commission warned of rising downside risks and downgraded the euro zone economic outlook in its latest forecast. ECB minutes also indicated a governing council agreeing on the need to prepare for policy easing. Despite that we can see EURUSD holding between 1.1240 to 1.1280 range.

Where next for GBPUSD?

It is a widely accepted opinion that politics can affect currencies (along with energy and gold) more than any other markets. Hence the race for Number 10 Downing Street stands to be crucial for the future direction of the pound sterling. So far, the UK Prime Minister contender Boris Johnson has rather easily overcome his wide-ranging rival Tory MPs, with only Jeremy Hunt remaining in the contest. Johnson is clearly the favourite with the Conservative membership if the votes so far are anything to go by (he already crossed the magic threshold of 105) and as a result, should be confirmed as the new Prime Minister over this coming weekend.

So, where does Boris Johnson stands with regards to Brexit?

He is adamant that a new deal can be struck with EU, one that is more favourable to the UK, although to do that he is constantly refusing to take a no deal Brexit off table. That puts him at odds with UK Parliament who will not allow such a deal. On the other hand, the EU said they will not renegotiate. It’s clear that something will have to give, one way or the other. The perceived risks are Britain crashing out of the EU with no deal, or a second referendum on Brexit, general elections followed by a Labour win, or yet another delay beyond the current deadline of 31 October this year.

Depending on the different methodology used, and certainly historically, the general consensus is that the pound sterling has a fair value range of somewhere between 1.50 to 1.60 to the US dollar (aqua strip on the chart). But for a return to these levels to occur, the Brexit issue probably needs to be put to rest, one way or the other. It was the ongoing uncertainty that took its toll, resulting in GBPUSD nosediving last week, dropping below the strong support around 1.25 mark. It reached a two-year low of 1.2440, the weakest level since April 2017 (although this level is being tested at time of writing). A string of disappointing UK economic data also acted as catalysts in hurting the pound.

Somehow in another twist of events the Federal Reserves offered a brief respite. Fed Chair Jerome Powell was very dovish in his testimony in front of Congress saying that US-China trade dispute is of particular concern going forward. This despite the surprisingly much better than expected non-farm payrolls figures. As a consequence, the dollar was badly hurt, which allowed GBPUSD to rebound to 1.2578. That was rather short lived, and sterling is now back below the psychologically important 1.25 to the dollar.

On the downside, all the eyes will be on support around 1.2450 – 1.2500 area. If that does not hold it could open the door for another slump to the next support level just above 1.2350 last seen in March 2017, followed by 1.2200. A retest of the record low of 1.1987 seen in January 2017 cannot be ruled out either.  

On the upside a close above 1.25 will bring in the support turned resistance at 1.2570 followed by major resistance at 1.2750. It is also quite possible the market hangs about in a consolidation pattern for a while due to a lot of unanswered questions about Brexit. Furthermore, as it is summertime, politicians take a break, traditionally resulting in a quieter period, certainly in terms of political news.

Further consideration should also be made to the 9 day (pink line) and 21 days (blue line) moving averages. It can be seen that when the 9 MA crossed below the 21 MA, it signalled a drop in the GBPUSD, like it did in August 2008, November 2014 and June 2018. Conversely it signalled a rise in October 2013 when the 9 MA crossed above the 21 MA. It looks like the crossover is a good signal in trending markets and not in a consolidation period (2009 to 2014). Currently the 9 MA is below the 21 MA but before we rush into the bearish outlook, it could be possible that we see another sideways range largely between 1.1980 – 1.4250.

One final note; the chart shows the sterling being in a downward trend well before the Brexit vote, and the pullback just before June 2016 was probably driven by expectations of a winning Remain vote. Is this recent move lower a further confirmation of this long-term trend!