Sterling Remains Locked in The Political Headlights

Stuart Cowell

Weak UK Inflation Numbers

UK August CPI came in weaker than expected, dropping to a headline rate of 1.7% year/year, down from 2.1% year/year in July. The median forecast had been for 1.9% year/year. Core CPI also abated much more markedly than expected, to a rate of 1.5% year/year, down from 1.9% year/year in the month prior. Input prices showed mostly negative prints, too.

The dip in inflation comes despite a 5%-plus weakening in the trade-weighted value of the pound from August 2018 levels, and despite UK wage growth hitting a near 10-year high recently.

UK yields and the Pound took a turn lower since the release, though the BoE is likely to remain on the sidelines with the Brexit process coming to a resolution, with the outcome and thereby associated impact on the UK economy still uncertain.

Ahead of the UK inflation data, Cable had triggered lower on the simple Crossing Exponential Moving Average (EMA) strategy (H1). The 5-period EMA crossed below the 9-period on the close of the 09:00 candle. The second trigger and Entry was a close below the 20-period moving average (the Bollinger Band mid-line) on the chart below at the close of the 10:00 candle (1.2472).

This approach uses the Average True Range (ATR) to generate target levels, with 1 x the ATR as Target 1 (1.2461) and 2.5 x the ATR as Target 2 (1.24445). At 10:00 the GBPUSD (H1) had an ATR of 11pips. The initial Stop Loss level should be where the market has turned, and this morning it was at the key psychological 1.2500 zone, which is now a 4-day resistance level, following the break of the 20-day moving average on September 4th.

Cable (and most USD crosses) will likely now remain in tight ranges ahead of the FOMC announcement at 18:00 (GMT) where expectations are for a 25 basis point cut and communication that pegs the move more as a mid-cycle adjustment and less as a second cut in a protracted easing cycle.

The BoE policy decision tomorrow is likely to be a non-event, with no-change widely anticipated as their hands remain tied to the political ramifications of the Brexit process.

The UK Supreme Court is currently hearing the government’s appeal on the ruling from Scotland’s highest court that the government’s suspending of parliament was illegal. A decision is expected Thursday or Friday.

Most likely, although not a certainty, it will agree with the recent court rulings seen in England and Northern Ireland, that the matter was “non-justiciable” — being political rather than a legal matter. Most likely, Brexit will be delayed to January 31 and a general election staged in late November or December. The election will presumably be the final Brexit battle.

One of four endgame scenarios will be produced by the election, depending who the victor is, or what possible inter-party alliances or coalitions prevails: 1, a no-deal Brexit on January 31 (which would be the fruit of a possible Conservative-Brexit party coalition); 2, Brexit with a deal and transition phase (the Conservative Party’s preference, though the party would have to win the election outright, which there is potential for, and reach an accord with the EU, which would be an uncertainty); 3, Brexit with a deal and multi-year transition period, but also subject to a “confirmatory” referendum (which is the position of Labour and SNP); 4, Brexit cancelled (which is the position of the Liberal Democrats).

For the Pound, which has been principal conduit of financial market opinion of Brexit, outcome number 1 would be the most bearish scenario, while outcome 4 would be the most bullish.

Stuart Cowell, Head Market Analyst at HotForex

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This article was originally posted on FX Empire

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