The British pound tumbled during the Asian morning Monday, following media reports over the weekend regarding Brexit and immigration control, as well as the prospect of a second Scottish independence referendum. Firstly, according to the Telegraph, PM May is expected to announce that EU citizens who travel to Britain after the triggering of Article 50 in March will no longer have the automatic right to stay in the UK permanently. This is a significant development because prior to this, the UK was expected to keep the free movement of people principle intact until it exited the EU in roughly two years. In our view, the fact that PM May wants to take full control of Britain’s borders as soon as when the exit negotiations begin, confirms that the government’s top priority is immigration and not access to the single market, and enhances our view that we may be headed for a "hard Brexit". The other story over the weekend that may have weighed further on sterling was that the Scottish National Party raised the issue of a second Scottish independence referendum at a private meeting with May’s administration last week. Although this prospect is not new, the report added that according to government sources May could agree to a new Scottish vote, but on condition it is held after the UK departs from the EU.
Coming on top of Q4 GDP data showing falling business investment and a BoE that appears to be in absolutely no rush to raise rates, these fresh signals of a "hard Brexit" and the risk of another Scottish referendum amplify our view that the broader outlook for GBP remains negative. What’s more, given the uncertainty surrounding fiscal policy in the US, we would avoid exploiting GBP weakness through Cable. Instead, our favorite proxy for any potential sterling softness in the foreseeable future is still GBP/JPY, considering that the looming political risks in Eurozone could strengthen the yen due to its safe haven status.
GBP/JPY traded lower on Friday to break below the support (now turned into resistance) territory of 140.00 (R1) and the upside support line drawn from the low of the 16th of January. The rate slid further during the Asian morning Monday, before finding fresh buy orders marginally above the 138.90 (S1) area and subsequently rebounding somewhat. The fact that the rate has exited a triangle formation to the downside confirms that the short-term outlook of the pair is negative. As such, even though the latest rebound may continue for a while and perhaps test the 140.00 level (R1) as a resistance, we would expect the bears to take control again at some point and push the price lower for another test at 138.90 (S1). A clear break below that zone could set the stage for further declines towards the 138.50 (S2) territory.
During the European day, the data calendar is very light. The only noteworthy indicator we get is Eurozone’s final consumer confidence index for February.
In the US, durable goods orders for January are due to be released. The forecast is for the headline rate to have rebounded from previously, while the core figure is expected to have risen for the 5th consecutive month, indicating that despite some softness in civilian aircraft orders, the underlying trend in durable goods continues to be to the upside. The case for solid durable goods orders is supported by the nation’s ISM manufacturing PMI for the month, where the new orders sub-index, already at an elevated level, rose for the 5th straight month. Something like that could bring USD under renewed buying interest.
EUR/USD traded lower on Friday, falling below the support (now turned into resistance) barrier of 1.0600 (R1). Given that the pair has resumed its downfall after testing as a resistance a short-term downtrend line taken from the highs of the 6th of February, we believe that the short-term bias remains negative. Strong US durable goods orders today could be the catalyst for further declines, perhaps for an initial test of our 1.0530 (S1) support level. Nevertheless, with not much else on the economic calendar today and with investors focus being on Trump’s address (see below), we would expect any declines to stay more or less limited near the 1.0500 (S2) psychological barrier.
We have only one speaker scheduled for today: Dallas Fed President Robert Kaplan.
As for the rest of the week
On Tuesday, the highlight of the day will be US President Trump’s address to a joint session of Congress. Following Trump’s recent pledge that he is going to announce a "phenomenal" plan on tax reform within the next weeks, market participants will be on the edge of their seats for any details regarding the new administration’s fiscal plans. As for the US data, we get the 2nd estimate of Q4 GDP.
On Wednesday the Bank of Canada rate decision will take center stage. The forecast is for the Bank to remain on hold. In such a case, market focus will quickly turn to the statement accompanying the decision for any forward guidance, as there is no press conference by Governor Poloz. Given the progress in economic data since the latest BoC meeting, the tone of the statement could remain neutral overall. As for the economic data, we get Australia’s GDP for Q4, Germany’s preliminary CPI for February, and the UK’s manufacturing PMI for the same month. What’s more, we get personal income and spending data for January from the US, as well as the core PCE price index for that month.
On Thursday, Eurozone’s preliminary CPI for February and Canada’s GDP data for Q4 are coming out.
On Friday, during the Asian morning, we get Japan’s CPI figures for January. During the rest of the day, we get the UK services PMI for February, and from the US, the ISM non-manufacturing PMI for the same month.