Sterling surged broadly last week after as UK Prime Minister Boris Johnson struck a new deal with EU on Brexit. It appeared that UK was on track to leave EU on October 31 in an orderly way. The development also took other European majors higher. However, uncertainty re-surfaced as the meaningful vote on the deal wasn’t held in the House of Commons on Saturday. Instead, Johnson is now forced to seek another Brexit extension by an amendment. Northern Ireland’s DUP also maintained its stance against the deal. Sterling might suffer some setback initially this week.
Dollar suffered heavily selloff and ended as the weakest performing one, followed by Yen. Technical development of the greenback didn’t look too well. But the decline looked exaggerated by readjustment on Brexit uncertainty. More time is still needed to confirm bearish reversal in the greenback. Canadian Dollar was the third weakest as traders turned cautious ahead of elections. Australian Dollar was mixed after job data lowered chance of another imminent RBA cut.
UK Johnson forced to seek Brexit delay after losing Letwin amendment
UK Prime Minister Boris Johnson’s effort to end Brexit drama failed, at least for now, after suffering humiliating defeat in the House of Commons today. MPs passed an amendment tabled by former Conservatives Minister Oliver Letwin by 322 to 306. Under the amendment, the so-called Benn act was trigger that forces Johnson to seek Brexit extension through January 31, 2020. And, the meaningful vote on the Brexit deal wouldn’t be held today. Johnson said immediate that he will not negotiate a further delay with the EU. But in doing so, he could in the end face being held in contempt of court.
Meanwhile, Europe Commission spokesperson quickly said “The European commission takes note of the vote in the House of Commons today on the so-called Letwin amendment meaning that the withdrawal agreement itself was not put to vote today. It will be for the UK government to inform us about the next steps as soon as possible.”
The Pound, and other European majors, might suffer some setback as the week opens. But Johnson is generally expected to concede and seek a delay. And EU is not expected to reject it despite all the hassles. Thus, any setback could be temporary. And the guesses on whether Johnson would get enough votes for his deal would continue.
Dollar selloff exaggerated due to readjustment of Brexit uncertainty
Dollar’s steep selloff last week was partly due to intensified expectations for October Fed cut, after some weak economic data. Fed fund futures are now pricing in 91.4% chance of another -25bps cut on October 10 to 1.50-1.75%. However, we didn’t see a surge in Gold accompanying Dollar’s weakest. Optimism over a Brexit deal could also pushed some funds out of safe-haven Dollar. Yet, there was no apparent selloff in US bonds too, as seen in steadiness of 10-year yield. Hence, overall, the weakness in Dollar could just be exaggerated by readjustment of Brexit uncertainty, which could be very much priced in already.
Dollar index’s up trend at risk after steep selloff
Dollar index’s medium term up trend appears to be at risk after last week’s steep selloff. Yet, the index is actually still holding above rising 55 week EMA (now at 97.00). Thus, rise from 88.25 (2018 low) is still in favor to continue to 78.6% retracement of 103.82 to 88.25 at 100.49. However, break of 55 week EMA will be the first sign of medium term reversal. Sustained break of 95.84 support would confirm, and open up the bearish case for retesting 88.25 low in medium term.
10-year yield struggled around 55 day EMA
10-year yield was stuck in very tight range around 55 day EMA last week. Overall outlook is unchanged. Consolidation pattern from 1.429 is now in its third leg. Stronger rise could be seen to 1.903 resistance and above But upside should be limited by 38.2% retracement of 3.248 to 1.429 at 2.123. Larger down trend is still in favor to resume through 1.429 at a later stage.
Gold’s sideway consolidation continued despite Dollar selloff
Despite the steep selloff in Dollar, Gold was just steadily in range last week. It’s struggling around 55 day EMA for now, as consolidation pattern from 1557.04 extends. Deeper decline cannot be ruled out. But we’d expect strong support form 38.2% retracement of 1266.26 to 1557.04 at 1445.96 to contain downside to bring rebound.. On the upside, above 1535.68 minor resistance will argue that the up trend from 1160.17 is starting the five leg of the five wave sequence, for above 1557.04.
GBP/USD Weekly Outlook
GBP/USD’s rally accepted to as high as 1.2989 last week, before forming a temporary top there. Initial bias is neutral this week for some consolidations first. In case of retreat, downside should be contained by 1.2582 resistance turned support to bring rise resumption. On the upside, break of 1.2989 will extend the rally from 1.1958 to 161.8% projection of 1.1958 to 1.2582 from 1.2195 at 1.3205 next.
In the bigger picture, current development affirms the case of medium term bottoming at 1.1958, ahead of 1.1946 (2016 low). At this point, rise from 1.1958 is seen as the third leg of consolidation from 1.1946. Further rise would be seen back towards 1.4376 resistance. For now, this will remain the favored case as long as 1.2195 support holds.
In the longer term picture, at this point, price actions from 1.1946 are seen developing into a corrective pattern. That is, down trend from 2.1161 (2007 high) is still expected to resume later. But sustained break of 1.4376 resistance will now be a strong signal of long term reversal.