Pound Braced for a Showdown

The pound has been remarkably stable this week following the news that Boris Johnson was

duly ensconced as Prime Minister of the UK. Now of course that outcome was hardly a

surprise to the markets and given that it was surely priced in at 1.2450 anyway. That also

might explain its slight rebound elsewhere- most notably versus the EUR.

The GBPEUR did actually manage to break above 1.12 yesterday, forcing its way to a high of

1.1247 before retreating back, closer to 1.1150 after the European close. Admittedly much

of that move was centric to the EURUSD which fell to a fresh two-year low of 1.1102

yesterday. That move came just after the ECB boss, Mario Draghi commenced his post ECB

policy meeting press conference. Perhaps it was no surprise that Draghi’s opening

comments were so dovish, but despite the initial drop, the EURUSD almost immediately

rebounded sharply, back towards 1.12 again.

Now, this is a pattern that keeps repeating itself over recent months- technical price breaks

to fresh medium/long term highs, or lows followed by an immediate volte face- IE no follow-

through whatsoever through a break level and then the ensuing and immediate reversal.

Indeed, we’ve seen this happen on a number of pairs this year and it is fast becoming a

rather predictable dynamic to the currency markets that makes it even more trap door

laden than ever I’m afraid. Moreover, what this kind of price action suggests; is that it’s

driven by stop loss orders and little more. The phase we often used to utter in the days

when dealers were men (mostly) and robots were just for Star Wars movies was: “selling or

buying the breaks simply doesn’t work at the moment shag’.

Still it is what it is I guess and hence perhaps no surprise that in the event the EURUSD

ended the US session, largely unchanged from the day before at 1.1147. Besides in

reference to this latest price action, the fact that there was no downside follow-though on a

two-year price break is most likely due to the impending US GDP numbers due out later

today and because the headline of that data is expected to be weak. The other thing to

consider on that price action is the fact that the USD index couldn’t get past 98 despite two

attempts at the level. Beyond that point 98.35-40 still guards the topside and certainly a

level to consider when examining sustained downside on the EURUSD.

Meanwhile, since Johnson took office, the GBPUSD has been gyrating in between 1.2420-

1.2520. In the very short term there is an interim double top at 1.2520 now which if broken

could yield some upside, but overall and in the absence of anything positive yet on the

Brexit front, any significant gains are going to be hard fought still. That’s especially the case

given the rhetoric from Brussels yesterday- they are not budging an inch yet it seems.

I don’t think this should come as much of a surprise quite frankly and with gauntlets now

laid down on both sides the battle will continue to unfold all the way to the next deadline I

assume? Having said that, there’s a lot yet to flow under bridge between now and then I

suppose. Moreover, the chances of a general election before the end of October are

extremely live and that’s surely not a prospect the pound will relish either.

Earlier in the week I noted the GBPJPY cross and that’s a key pairing to watch closely in the

coming weeks because as I said on Monday; its grinding it way slowly towards what I

consider to be the ‘danger zone’. What I mean by that; is a long term breakdown level that

could yield some significant further acceleration. However, and as I also noted; its still well

above 130, currently around 135. Now that might seem all well and good, but just

remember that when this puppy moves it can really shift and for me that danger zone on

this cross is closer to 115-120. So as I said; that’s still some way off, but something

nevertheless to take note of all the same.

Naturally, that cross is as much about the JPY as it is about the GBP, so when this really will

become live; is if we do get an axe through the coffee table on the European divorce, at the

same time as significant risk-off drivers elsewhere lift the JPY. Hence, I am keeping a very

close eye on this one as it’s a pair that I often have a position in via unhedged equity market

trackers. Whilst often an FX play for me, consideration also has to be given on the direction

of the Japanese equity markets of course. Anyway food for thought perhaps and I will share

some long term charts with you on the GBPJPY next week.

However, for most non FX market participants it’s the GBPUSD and the GBPEUR that are the

barometers of how the currency is faring. Clearly, looking at the immediate price action on

both the jury has not yet been swayed. Just now most people, and politicians are hoping

that a no deal Brexit can still be avoided, but optimism on that isn’t exactly strong. Leaving

aside anything else, the degree to which that optimism now rises or fades will be replicated

in the immediate price swings on both pairings.

Finally, and regardless of which side of the Brexit divide one resides, its surely now even

clearer for all to see that the tone from Brussels is as consistent in its dogmatic and

unbending determination as it ever has been. Whilst the likes of Barnier would argue that

it’s their prerogative to be that way; it is after all such dogma that got us to where we are in

the first place. I hope that changes in the coming weeks, but somehow I very much doubt

that it will.

Important Economic Releases Due Later Today

26/07- 1.30pm US Q2 GDP and Personal Consumption/Prices Revisions