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UK Weekly Market Analysis
Faith in Sterling Wanes as Political Scandal Weighs

David Starkey November 9, 2017

– Technical resistance takes root on GPBEUR triple-top

– With the BoE in rearview mirror, GBP looks to data for guidance

– USD on eggshells ahead of CPI as December Fed watch shifts into high gear

Performance this week in the British pound has been uninspiring. GBP has been unable to mount any kind of rebound following last week’s Bank of England-related sell-off. Currency markets appear to be unwilling to offer sterling the benefit of the doubt, and were quick to sell any small rallies throughout the week. Like the second day after a holiday has ended, the enthusiasm for a rate hike from the BoE has faded. Instead, it has been replaced with political scandal.

GBP will be happy to draw a line under this week and move on. However, that likely doesn’t come close to how British Prime Minster Theresa May likely feels about this week. It’s been a tough week for May, who has been fending off scandal on multiple fronts: fallout from accusations of sexual misconduct at the ministerial level, the resignation of international development secretary Priti Patel after scandal about unauthorised meetings with Israeli dignitaries, and calls to sack Foreign Secretary Boris Johnson. Johnson, amongst his many diplomatically embarrassing comments, most recently triggered controversy over comments about a Brit jailed in Iran on espionage charges. On second thought, however, May might be grateful for the opportunity to see Johnson, who is one of her greatest political rivals, to the door. Either way, sentiment in sterling has taken a hit as political disorder diminishes the ability of the parliament to do its actual job of governing.

Off of charts, GBP’s failure to take back previous losses cements the importance of historical resistance levels in trading against the euro. On three separate occasions, rallies during recent months have been met with substantial selling in the 1.14 area. So long as resistance in this area holds, the risk of a retracement back down to the 2017 low of 1.08 remains elevated. Meanwhile, a break higher cold signal a move back into the pre-UK snap election range with scope up towards 1.20.

It’s a big week for British economic data coming up as fresh numbers for CPI, employment statistics, and retail sales will be all published. In the last six months or so, as inflation started to trend above target, CPI results have become a hot-button topic. Accordingly, monthly results have always garnered special levels of scrutiny. However, the Bank of England made good on cogitations about a rate hike last month. For the moment, expectations of further monetary policy changes in the near term are quite limited. As such, next week’s CPI data might not have the same impact on currencies as it has in months past.

While UK CPI may prove to be anti-climactic, the same can’t be said about the American version, which will also be reported next week. As it stands, markets have more than 90% priced in an interest rate hike from Federal Reserve in December. However, the Fed has been unequivocal: data drive rates. Any sign of economic weakness, specifically with respects to inflation, will put policy changes on hold. CPI growth in 2017 has been something like a slow trickle, and not a powerful surge. Given this and the degree to which a rate hike is already priced in for next month, risk is asymmetrically to the downside for greenback.

It has been 18 months since the referendum, but Brexit remains as relevant as ever when it comes to interpreting data. UK and EU negotiators are no further along in the process of a formal exit today than they were the day Article 50 was triggered. This has resulted in historical levels of uncertainty for the British economy. Traditionally, caution translates into reduced spending from both businesses and households. Evidence of this has already started to crop up in consumer-spending and credit-card processing data, although employment statistics have so far remained robust in 2017. Evidence of instability in the labour market, particularly via the average earnings component of data, could be a sign that the toll of Brexit is spreading.

Despite the risk of sounding like a broken record, sterling has proven to be especially sensitive to Brexit-related sentiment. A bad day of Brexit-related newspaper headlines has cost GBP 2% or more many times in the past. Now that a BoE rate hike has been confirmed and the attention of markets is back on UK-EU relations, next week’s data could present fresh risk to GBP.

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