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GBP edges higher ahead of inflation data

UK August inflation gauge is due for release alter today and is expected to have accelerated further in August. The consumer price index should print at 2.8%y/y, reflection both rising fuel price and a weak pound sterling. The core gauge, which excludes the most volatile components, should also overshoot the BoE target of 2% (median forecast of 2.5%y/y).

Given the fact the BoE made clear it is ready to tolerate higher inflations level as the negative effects of the Brexit are still to come, it is unlikely that the pound sterling appreciates sharply should inflation accelerates more than expected. Similarly, a disappointing reading won’t trigger a sell-off in the pound as it will only bring the gauges closer to the BoE’s target.

On the political side, Theresa May’s Brexit bill made an advance yesterday as lawmakers approved her bill, which is aiming at repealing the 1972 European Communities Act. This is just the beginning of May’s long journey to take Britain out of the EU.

The pound sterling was trading broadly higher on Tuesday morning amid an improving overall risk sentiment. The cable was up 0.20% to 1.3190 and getting closer to the next resistance that lies at 1.3267 (high from August 3rd). The pound rose the most against the Japanese yen as the pair rose 0.225% to 144.42.

ECB: Vice President Constancio set to speak

A week after the ECB meeting where the rates remained unchanged, ECB Vice President Constancio is going to hold a speech in Frankfurt. It is worth betting that most of the discussion will be around the Eurozone inflation and in particular the ECB difficulties to boost consumer prices.

Early September, Constancio already mentioned that the lack of inflation is set to persist in particular due to economic difficulties of the United States and geopolitical risks that should weigh on the global economic conditions. One could also say that massive QE does not have the expected results.

Most of the European government bonds in the front end of the yield curve are now trading a negative interest rate and it has been a while since investors are trading bonds for capital appreciation rather than yields because of free money. All of that is underpinning low inflation. Markets expect normalisation and higher asset yields but when the ECB removes it stimulus, good chances are that it could trigger massive losses in different asset classes.

Rumours are that the ECB said should be ready, at the next meeting late October, to reduce their massive asset purchase program from 60 billion euros a month to 20 or 40 billion euros a month. Markets are still largely bullish on the euro even though we do believe that markets are overly optimistic regarding the European Central Bank, for now.

Strong bearish acceleration extends into the third straight day and pressures psychological 0.9000 support (reinforced by 55SMA) after better than expected UK CPI numbers in August (2.9% vs 2.8% f/c and 2.6% in July) further boosted sterling.

Pullback from 0.9306 (29 Aug high) broke below 50% of 0.8742/0.9306 upleg (0.9025) and could extend towards key barriers at 0.8952 (top of rising daily cloud / Fibo 61.8% retracement) and 0.8926 (Fibo 38.2% of larger uptrend from 0.8312, 2017 low) on break below 0.9000 pivot.

Bear cross of daily Tenkan-sen / Kijun-sen supports bears, which may show signs of stall on approach to daily cloud as daily studies are oversold but without firmer reversal signal seen for now.

Res: 0.9025, 0.9071, 0.9090, 0.9125
Sup: 0.9000, 0.8952, 0.8926, 0.8875

GBP/USD – 1.3263





Original strategy :

Buy at 1.3125, Target:1.3300, Stop: 1.3065

Position: -

Target:  -

Stop: - 




New strategy :

Buy at 1.3170, Target:1.3370, Stop: 1.3110

Position: -

Target:  -

Stop:- 



Cable only eased to 1.3161 before finding renewed buying interest and sterling has surged again today, current breach of previous chart resistance at 1.3269 confirms medium term upmove has resumed, hence further gain to 1.3300-10 and later 1.3350-55 (50% projection of 1.2109-1.3269 measuring from 1.2774) would be seen, however, near term overbought condition should limit upside to 1.3390-00 and price should falter below 1.3440-50, bring retreat later.

In view of this, would not chase this rise here and would be prudent to buy sterling on subsequent pullback as said support at 1.3161 should limit downside, bring another rise later. Only below previous resistance at 1.3080-85 would defer and risk test of 1.3030-33 support, break there would suggest a temporary top is formed instead, risk correction to 1.2990-00 first.

Our preferred count on the daily chart is that cable's rebound from 1.3500 (wave (A) trough) is unfolding as a wave (B) with A ended at 1.7043, followed by triangle wave B and wave C as well as wave (B) has ended at 1.7192, the subsequent selloff is the larger degree wave (C) which is still unfolding with minor wave (III) of larger degree wave 3 ended at 1.1986, hence wave (IV) correction is in progress which could either be a triangle wave (IV) of a complex formation but upside should be limited to 1.3500 and price should falter well below 1.4000, bring another decline in wave (V) of 3 for weakness to 1.1500, then 1.1200. 


GBP/JPY - 145.60

Original strategy:

Buy at 142.45, Target: 144.45, Stop: 141.85

Position: -
Target: -
Stop: -

New strategy :

Buy at 144.80, Target: 146.80, Stop: 144.20

Position: -
Target:  -
Stop:-

As sterling’s upmove has accelerated after breaking above resistance at 143.00, suggesting the entire a-b-c correction from 147.75 ha ended at 139.35 and bullishness remains for this rise from 139.35 to extend further gain towards resistance at 146.80 (b leg top), however, a sustained breach above there is needed to retain bullishness and extend further gain to 147.30-40 and later towards said recent high at 147.75 which is likely to hold from here due to near term overbought condition,

In view of this, we are looking to buy sterling on pullback but at a higher level as 144.80-90 should limit upside. Only below said previous resistance at 143.00 (tentatively wave i top) would abort and signal top is formed instead, bring weakness to 142.50, then 142.20-25, however, reckon support at 141.30-35 would remain intact, bring another rebound later. 

Our preferred count is that larger degree wave V with circle is unfolding from 251.12 with wave (I) 219.34, (II): 241.38 and wave (III) is subdivided into 1: 192.60, 2: 215.89 (23 Jul 2008) and wave 3 ended at 118.87 earlier in 2009. The correction from there to 162.60 is wave 4 which itself is a double three and is labeled as first a-b-c ended at 151.53, followed by wave x at 139.03, 2nd a ended at 162.60, 2nd b at 146.75 and 2nd c leg of wave 4 ended at 163.00. Therefore, the decline from 163.00 to 116.85 is now treated as wave 5 which also marked the end of larger degree wave (III), hence wave (IV) major correction has commenced for retracement of the wave (III) from 241.38 and upside target at 183.95-00 (50% Fibonacci retracement of the wave (II) from 241.38) had been met, a drop below 160.00 would suggest wave (IV) has ended at 195.85, bring decline in wave (V) for initial weakness to 130 (already met) and 120.


The dollar maintained its strength against its rivals during the Asian trading hours as experts downgraded the impact of Hurricane Irma, while the UN Security Council approved a lighter package of sanctions on North Korea. Meanwhile, the British government won the vote on the EU withdrawal bill, lifting the pound to a one-month high versus the euro.

With the economic calendar lacking significant releases, the greenback continued its uptrend in Asia as, for the moment, investors ruled out extreme weather in the US and fresh tensions in the Korean peninsula.

Florida's residents were on the way back home after two days since Hurricane Irma hit the area with powerful winds, turning roads into rivers and causing destructive damage. However, Irma's impact was downgraded on Monday, supporting US economic growth a week before Fed policymakers meet to decide on interest rates.

In the meantime, the 15-member UN Security Council, which held an anonymous vote yesterday, decided to impose a softer punishment to North Korea, which has so far defied global calls for termination of its aggressive nuclear program. Particularly, the council approved a draft resolution in which it added restrictions to the regime's textile exports and fuel supplies, while it also withdrew an oil embargo and entirely relaxed restrictions on Kim Jong-Un's assets.

Following the aforementioned news, the dollar index climbed near the 92 key level, before edging down to 91.80. Dollar/yen was up by 0.16% on the day at 109.57, while dollar/swissie was trading mainly flat in Asia around 0.9554.

The safe-haven gold lost ground for the third consecutive day, falling close to a two-week low of $1,323.15 per ounce.

In the UK, the Parliament welcomed the vote on the EU repeal bill overnight after eight hours of debating, driving sterling to a one-month relative to the euro as euro/pound fell to 0.9063. Pound/dollar was up by 0.24% at 1.3195. The UK prime minister, Theresa May, commenting on the vote, which aimed to attach the EU laws on the British legislative framework and thus facilitate business activities, said that now the bill could move to the next level with “solid foundations”.

Later in the day, investors will keep a close eye on inflation figures out of the UK which come before the Bank of England's policy meeting on Thursday. Expectations are for the yearly CPI reading to increase by 0.2 percentage points in August to 2.8%.

Regarding energy markets, oil rebounded as fears over a slowdown in demand receded and more US refineries along the Texas Gulf Coast restarted their operations. WTI crude oil jumped to $48.09 per barrel after it sank slightly below the $47 key level on Monday. London-based Brent rose to $53.71 per barrel.

Due to increasing oil prices, the commodity-linked loonie gained against the dollar, leading dollar/loonie down by 0.12% to 1.2094.

EUR/JPY - 131.25

Original strategy:

Sold at 130.20, stopped at 130.80

Position: - Short at 130.20
Target: -
Stop: - 130.80

New strategy :

Stand aside

Position: -
Target:  -
Stop:-

Euro’s rebound from 129.46 turned out to be much stronger-than-expected, dampening our bearishness and the breach of previous resistance at 131.09 suggests the retreat from 131.71 has possibly ended and gain to 131.55-60 is likely, however, break of said resistance at 131.71 is needed to revive bullishness and confirm recent upmove has resumed and extend further gain to 132.40-50 later.

In view of this, would not chase this rise here and would be prudent to stand aside for now, Below 130.65-70 would bring pullback to 130.25-30, break there would suggest the rebound from 129.37 has ended and prolong choppy trading, risk weakness to 129.95 and possibly 129.60 but said support at 129.37 should remain intact.

Our latest preferred count is that wave (ii) is ABC-X-ABC which ended at 123.33 and wave (iii) is unfolding with wave iii ended at 100.77, followed by wave iv at 111.57 and wave v as well as the wave (iii) has ended at 97.04, followed by wave (iv) at 111.43 and wave (v) has ended at 94.12 which is also the end of the larger degree v, this also implied the major wave (C) has also ended there, hence major correction has commenced from there with (A) leg unfolding in its lower degree wave c which has possibly ended at 145.69. Under this count, A-B-C wave (B) has commenced with A leg ended at 136.23, wave B at 143.79 and wave C has possibly ended at 149.79.

Our larger degree count is that the decline from 139.26 is wave (C) and is sub-divided into a diagonal triangle i-ii-iii-iv-v with wave i - 105.44, wave ii- 123.33, wave iii - 97.03, wave iv - 111.43, followed by the final wave v as well as the end of wave (C) at 94.12, this also mark the bottom of larger degree wave B. Under this count, major rise in wave C has commenced as an impulsive wave with minor wave III ended at 145.69, wave V is still in progress for further gain to 150.00. Having said that, this so-called wave V could well be the first leg of larger degree 5-waver wave C and this wave C should bring at least a retest of wave A top at 169.97 (July 2008).

On the bigger picture, we are treating the rally to 169.97 as end of wave A, then selloff from 169.97 (July 2008) to 112.08 is wave (A) of B instead of end of entire wave B and then the rebound from there to 139.26 is wave (B), then wave (C) decline bought euro to as low as 94.12 and the strong rebound from there suggest this wave (C) as well as larger degree wave B has ended and major correction in larger degree wave C has commended for headway to 147.00 and possibly test of psychological resistance at 150.00. 

AUD/USD – 0.8041

Original strategy:

Exit long entered at 0.8050,

Position: - Long at 0.8050
Target:  -
Stop:-

New strategy :

Sell at 0.8090, Target: 0.7900, Stop: 0.8150

Position: -
Target:  -
Stop:-

Aussie’s retreat after rising to 0.8125 last week suggests a minor top has possibly been formed there and consolidation below this level would be seen with mild downside bias, below 0.7995-00 would bring test of previous support at 0.7963, break there would add credence to this view, bring retracement of recent rise to 0.7920-25 and later 0.7890-00 but support at 0.7867-71 should remain intact.

In view of this, we are looking to sell aussie on recovery as 0.8090-00 should limit upside. Above said resistance at 0.8125 would (last week’s high) would extend recent upmove in wave v of (iii) to 0.8150, then towards 0.8200, however, loss of upward momentum should prevent sharp move beyond 0.8225-30 and price should falter below 0.8250-60, risk from there is seen for a retreat later.

On the 4-hour chart, the move from 0.8066 is the wave 5 with i: 0.8860, ii: 0.8315, wave iii is an extended move ended at 1.0183, iv: 0.9706 and wave v has ended at 1.1081 (also the top of entire wave 5). The subsequent selloff is the major correction which is unfolding as ABC-X-ABC and 2nd A leg has ended at 0.8848, followed by a-b-c wave B which ended at 0.9758, hence, 2nd C wave is now in progress and indicated downside target at 0.7000 and 0.6950 had been met, so further fall to 0.6710-20 cannot be ruled out.

EUR/USD

Current level - 1.1976

The failure at 1.1950 signals another possible rise towards 1.2090 peak. Minor intraday resistance lies at 1.2000.

USD/JPY

Current level - 109.52

The uptrend is intact heading towards 109.80, en route to 110.60 crucial high. Initial minor support lies at 109.20 and crucial on the downside is 108.50.

GBP/USD

Current level - 1.3204

The slide to 1.3157 should be considered corrective and the risk of a tight test at 1.3260 is still vivid. The mentioned peak should be able to provoke a reversal for a deeper consolidation towards 1.3000 area.

Today, GBP traders will have their gaze locked on the UK CPI data for August. Expectations are for both the headline and core rates to have risen, something we agree with, given that the nation’s services PMI for the month showed that firms increased their prices charged at the highest rate since April. The recent depreciation of the pound against the euro supports further the case for accelerating inflation.

Even though a rebound in the CPI rates could support the pound and revive some speculation with regards to a BoE rate hike in the near term, we remain skeptical on that prospect. A few months ago, BoE Governor Mark Carney made it clear that a rate hike may depend mainly on firming wages and improving business investment. Given that business investment for Q2 was stagnant, we doubt that an actual rate hike is looming for now. However, if inflation indeed accelerates today and wages also accelerate tomorrow as anticipated, we would not rule out a slightly more hawkish tone from the BoE when it meets on Thursday.

GBP/USD traded lower yesterday after it hit again resistance at 1.3225 (R1). Nevertheless, the slide was stopped by the 1.3160 (S1) level. The price structure on the 4-hour chart suggests a short-term uptrend as marked by the short-term uptrend line drawn from the low of the 24th of August. As such, we expect the bulls to take the reins again soon and aim for another test near the 1.3225 (R1) line. The catalyst for such a rebound may be accelerating UK CPIs today. If the rebound is strong enough to overcome the 1.3225 (R1) resistance, then we may experience extensions towards our next obstacle of 1.3270 (R2).

Dollar stages a minor comeback as risks recede

The US dollar came under buying interest yesterday, reversing some of its recent losses, while US equity indices surged to close at, or near, all time high levels. We see two likely explanations for these market moves. Firstly, geopolitical risk receded somewhat after North Korea did not launch a missile for its anniversary over the weekend, as many may have expected. This seemingly drove investors out of the safety of US bonds, evident by the rise in Treasury yields, something that likely supported the dollar. In addition, the fact that Hurricane Irma has been less severe than anticipated so far, at least in terms of damage caused, may be another factor that supported the flight out of Treasuries and into equities.

In our view, the dollar’s broader outlook remains cautiously negative, amid an uncertain geopolitical outlook that frequently drives flows into Treasuries, relatively uninspiring US economic data, and subdued expectations for Fed rate hikes in the near-term. That said, we have to note that the pace of the currency’s depreciation has slowed substantially compared to recent months, which could be a preliminary sign that the greenback is trying to carve out a bottom. The US CPI data that are coming out on Thursday could play a critical role for the currency’s forthcoming direction.

USD/JPY surged yesterday, breaking back above the important resistance (now turned into support) barrier of 108.70 (S2). The rate is back within the sideways range that’s been in place since the 28th of July, between that barrier and the resistance zone of 111.00. Thus, we believe that the short-term outlook has turned back to neutral. Having said that though, we wouldn’t rule out further advances within the aforementioned range. At the time of writing, the pair is trading fractionally above the 109.25 (S1) line, and further advances could aim for the 109.85 (R1) resistance. A break above that zone could open the way for the 110.20 (R2) obstacle.

As for the rest of today’s highlights:

Besides the UK CPIs, we get inflation data for August from Sweden as well. The forecast is for the headline CPI rate to have remained unchanged, while the CPIF rate is forecast to have ticked down, something that could weigh on SEK. In the US, the JOLTS job openings for July are coming out.
We have only one speaker on the agenda: ECB Vice President Vitor Constancio. Following President Draghi’s remarks at the press conference after last week’s ECB policy meeting that the Bank should be ready to take the bulk of a decision on QE in October, we will monitor the Vice President’s comments for more clues on that front.

GBP/USD

Support: 1.3160 (S1), 1.3120 (S2), 1.3060 (S3)

Resistance: 1.3225 (R1), 1.3270 (R2), 1.3360 (R3)

USD/JPY

Support: 109.25 (S1), 108.70 (S2), 108.10 (S3)

Resistance: 109.85 (R1), 110.20 (R2), 110.65 (R3)

U.N Voted In Favour Of Stepping Sanctions on North Korea
Higher Call Premium Suggests Higher Euro
OPEC Considers To Extend Production Cut While US Refineries Resuming Operation Gradually
UK' CPI Data Influenced By Higher Fuel Price

European markets are continuing their ascent and picking up their momentum from Wall Street. The S&P500 index closed at a record high yesterday demolishing any resistance in its way. Investors are surely feeling less concerned about the potential hurricane damage costs. This has brought back the traditional risk-on trade.

U.N Voted In Favour Of Stepping Sanctions on North Korea

The risk-on trade is also influenced by the subdued North Korean situation. Having said that, the UN has decided to vote in favour of stepping up the sanctions on the country. Although, the approved sanctions by the U.N are toned down versions of what was discussed before. A reaction to this action should not be underestimated. This new situation has taken some steam out of the dollar rally. The dollar bounced from its two and half years low, but the lingering geopolitical situation shows we are not out of the woods yet. The element which could provide oxygen for the dollar rally would be a stellar reading of the US inflation number (due on Thursday).

Higher Call Premium Suggests Higher Euro

The euro-dollar has also retraced from its highs, the ECB president, Mario Draghi and other members of the governing council are using vigorous verbal intervention to keep the currency at a more reasonable level. However, the devil is in the detail and investors cannot ignore the fact that the minimal reduction in the inflation forecast paints a very bullish picture. In simple words, the ECB is confident that the domestic demand would be strong to offset the drag from the higher currency. Therefore, it confirms that there is still more upside for the Euro. The higher premium on calls of all tenors up to nine months is pretty much supporting this view.

OPEC Considers To Extend Production Cut While US Refineries Resuming Operation Gradually

Oil prices have shown a very much muted reaction to the news that the biggest oil player in the OPEC is open to extending the oil production cut. Russia is also on board along with other OPEC producer on this idea, however, if that will become a reality would be a different situation. The reason is that from the previous similar situations we have learned that this kind optimism changes to a more conflicting information as you move closer to the time. The US gulf coast refineries are gradually resuming their operations and this should support the oil price. The industry is still not back to its normal level after being hit by the worst hurricane since 2005 and nearly 12.5% refineries are still shut.

UK CPI Data Influenced By Higher Fuel Price

As for Sterling, it is the CPI data which is going to be under focus. It would provide the guidance and more daylight for traders in relation to the next move by the Bank of England. We do not expect the overall story to change which is that inflation is overshooting the bank's target thanks to a lower sterling. The bank would only change its stance on its monetary policy if inflation is supported by higher wages, not due to the lower currency. Another significant support for inflation is coming from higher fuel prices as the cost of filling up the tank at the gas station has increased nearly by 1.6%. Thus, the annual rate could see an uptick reading. Traders would take that as a signal that this is going to increase the pressure on the BOE to increase their interest rate.