Merkel helps Pound Rebound

In my previous article last Monday, I noted that the GBPUSD could lift if it could surpass

technical resistance just shy of 1.22. Well, that’s exactly what happened yesterday

afternoon when the German Chancellor, Angela Merkel held out an olive Branch in respect

to solving the Backstop Impasse.

Clearly, there were a lot of short GBP stops in place through 1.22 and that was obvious to

see from the upside price action yesterday- it simply didn’t touch the sides as it charged up

through the level, on its way to a session high of 1.2273. I earlier noted that a break up

through 1.22 could lead to a move back near 1.23/1.24 and for the record, I am still not

looking beyond that upper echelon yet. Naturally, its also very early days in respect of

whether or not this development will amount to anything at all, but it was surely enough to

provide any kind of excuse for the pound to rise yesterday.

Indeed, apart from that it was also quite clear that the downside momentum on the

GBPUSD was stalling after it had failed to make fresh interim lows for several sessions now.

The rebound in the GBPUSD also provided the necessary impetus for the GBPEUR to lift

decisively back through 1.10 this time after it previously touched that level last week, but

not managed to surpass it on the first time of asking. The price reached as high as 1.1079

yesterday and its still around 1.1045-50 as at 6.30am this morning.

The next upside technical levels of note on this one look like residing at 1.1136, 1.1263 and

1.1391. For sure the upside could extend further, even if hard fought and perhaps towards

the first two of those provided the news backdrop remains relatively positive. From that

perspective, I note that the UK Prime Minster was said to have punched the air when he left

his subsequent meeting with President Macron yesterday, but quite why is not yet exactly

clear. Over and above that, the higher GBP ensured that the FTSE underperformed all its

European counterparts yesterday.

Meanwhile, the EURUSD has slipped back again, towards 1.1060 this morning, despite some

better data out of Europe yesterday and correspondingly weak numbers from across the

pond. I think the simple reason for that, is in part down to the GBPEUR, and also because US

yields have again lifted more than their European counterparts. Oh, and of course a good

deal of market trepidation in respect of the dollar, from just what exactly the Fed Chair will

say in his widely anticipated Jackson Hole speech later today.

Elsewhere, the USDCNH has lifted back above 7.10 in Asian trading today, reaching 7.1069

ahead of the European reopening. A generally positive Asian equity market session has also

helped US and European futures lift ahead of the opening here a little later on and that in

turn has weighed on gold as has the higher US 10year yield this morning, which has backed

up to around 1.64%. Consequently, gold is back below $1500 again, currently trading

around $1495. We know the market is very long on this one now and hence it wouldn’t

surprise me if the price had another look at the $1480 low posted the 13 th August.

Understandably with gold lower this morning and the pound higher, the price of gold in GBP

has also come lower to around £1221 as I write and I note what I said previously about this

one; looking like it had come along way in a very short space of time. Well, it certainly looks

like its trying to retrace some of those gains now.

Delving a little further into the metal I note that for the most part over the past decade the

price of Gold has pretty much mirrored that of the EURUSD. To be more exact that close

relationship has been more about the dollar perhaps than the EUR, but in any case the

correlation between the EURUSD and the metal has been pretty close on a medium term


However, this year that has all unravelled as gold has taken off whilst the EURUSD has

continued to edge lower. To better see exactly how that looks on a chart of the two please

take a look at the corresponding price action of both below.

As you can see the two have diverged markedly since the start of 2019 and right now that

shows no sign of snapping back. That’s not to say it couldn’t of course, but it will surely need

the current equity/bond market or dollar dynamics to change materially first.

So, as the long weekend looms here in the UK, and with the weather set to be splendid,

many participants will probably want to get out of the door as early as they can today. In

that respect several will probably hope that Powell doesn’t rock the boat too much this

afternoon. Personally speaking and as I said before, I hope he does, but then again I was

never one to let my travel plans stand in the way of opportunity.

Important Economic Releases/Events Due Later Today

23/08- 3.00pm Fed Chair Powell addresses Annual Symposium at Jackson Hole