The British pound continued to rally on Friday, following some relatively hawkish comments from BoE MPC member Gertjan Vlieghe. Among other optimistic remarks, the policymaker said that the appropriate time for a rate hike might be as early as in the coming months, something that pushed the implied probability for a hike by December to 78%. Today, we will hear from BoE Governor Mark Carney, who will speak at the IMF. Should he reaffirm that a hike in the coming months is likely, sterling could gain further. Given the heightened speculation for a hike, we maintain the view that the short-term outlook of GBP remains positive.

Looking further ahead, the key risk to the continuation of the GBP rally are politics, we think. The latest focus on monetary policy developments seems to have shifted market attention away from the continued delays and the lack of progress in the Brexit negotiations. In addition, the upcoming Conservative Party conference (1st October) presents further political uncertainty, as any rebellious attempt to replace PM May could put a lid on further sterling gains.

EUR/GBP continued to tumble on Friday on the hawkish remarks by BoE’s Vlieghe, falling below the support (now turned into resistance) barrier of 0.8830 (R1). However, the slide was stopped by the crossroads of the 0.8780 (S1) support and the longer-term upside support line taken from the lows of November 2015. The price structure on the 4-hour chart continues to suggest a short-term downtrend, but given our proximity to the aforementioned crossroads, we prefer to take the sidelines for now. A clear break below that support zone is needed before we get confident on more bearish extensions. The catalyst for such a break may be more hawkish comments by BoE Governor Mark Carney today. If this is the case, we expect a dip below 0.8780 (S1) to initially aim for our next support of 0.8715 (S2). On the other hand, if the Governor appears less hawkish than expected, the pair could rebound from the longer-term upside support line.

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Yen continues to retreat amid early election reports

The yen retreated further on Friday, alongside other safe havens like gold, despite the North Korean missile launch that occurred a few hours earlier. Meanwhile, major global equity markets such as the S&P 500 closed the day at new record highs. In our view, this suggests that as long as the situation does not escalate into military conflict, market participants may continue to place less and less emphasis on North Korean developments.

Turning to Japan, reports over the weekend suggest that PM Abe is considering to hold a snap election as early as next month, in order to exploit the disarray in the main opposition party and gain a bigger majority for his own party. If early elections are confirmed in the next days, the increased domestic political uncertainty could be another factor weighing on the yen, besides the latest risk-on environment.

USD/JPY traded north on Friday and during the Asian morning Monday, the pair opened with a positive gap above the key resistance (now turned into support) of 111.00 (S1). That barrier acted as the upper bound of the sideways range that had been containing the price action since the 28th of July. As such, its break may have turned the short-term picture to positive, in our view. We now expect the bulls to remain in the driver’s seat and perhaps drive the battle higher for a test near the 111.70 (R1) line, marked by the peak of the 27th of July.

Today’s highlights:

Besides Carney’s speech, we only have Eurozone’s final CPIs for August. Nevertheless, the bloc’s final inflation data are usually not market movers.

As for the rest of the week:

On Tuesday, the only noteworthy data set we get is Germany’s ZEW survey for September. On Wednesday, the main event will be the FOMC gathering. This is one of the ‘bigger’ meetings, meaning that besides the rate decision we also get fresh economic forecasts for the US economy, an updated ‘dot plot’, as well as a press conference by Chair Yellen. Then on Thursday, focus will turn to the BoJ and Norges Bank policy meetings. Finally on Friday, Eurozone’s manufacturing and services PMIs for September are out, as well as Canada’s CPI data for August.

EUR/GBP

Support: 0.8780 (S1), 0.8715 (S2), 0.8640 (S3)

Resistance: 0.8830 (R1), 0.8920 (R2), 0.8985 (R3)

USD/JPY

Support: 111.00 (S1), 110.10 (S2), 109.55 (S3)

Resistance: 111.70 (R1), 112.20 (R2), 112.90 (R3)

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