Most of the financial headlines over the last 24 hours were related to the blossoming optimism that a Brexit agreement between the UK/EU had finally been reached. This was followed by the complete collapse of the current Brexit proposal and more uncertainty on both sides of the channel.
As discussed in Monday’s report, the harsh reality of UK partisan politics has torpedoed the narrative of a mutually beneficial settlement once again.
This time it was the resignation of the UK’s chief Brexit negotiator, Dominc Raab, which derailed the process and sent the Sterling sharply lower against all the G-7 crosses. This likely sets up a no-confidence vote for PM May, which could prompt Forex traders to sell the GBP/USD back down through the 1.2600 handle.
We understand what’s at stake for both the UK and the EU. And, we understand the potential impact a HARD BREXIT could have on the UK as well as the whole of the European continent.
However, we are surprised that the well worn Brexit negotiations roller coaster was able to completely overshadow the speech and subsequent comments made by FED chief Jerome Powell at an economic forum in Dallas yesterday.
Chairman Powell pulled no punches while hammering home his opinion that the US economy needs further interest rate adjustments higher, even if it means increasing the level of volatility in US equity markets.
Mr Powell was clear that the data dependency, which the FOMC will use to form their interest rate trajectory, will be based on the “real economy” and will not be influenced by fluctuations across the range of different asset classes … including Wall Street.
Furthermore, he emphasised that the FOMC were committed to “normalising” the short-term treasury curve, as well as reducing the FED’s balance by $50 billion per month … based on the dot plots from the previous FOMC meeting. There is now no reason for Forex traders not to believe that the US FED Funds target will be lifted to 2.50% in mid-December and that the FED will likely deliver 2 or 3 more adjustments higher before pausing in Q3 of 2019.
On balance, we believe that the market is underestimating the rate of US normalisation and that this rate divergence dynamic will keep the USD Index moving higher into to the end of the year against all the major crosses except the JPY.
We entered the week short the GBP/USD from 1.3055. Our initial profit target of 1.2710 came close to getting filled during yesterday’s London session. We suggest holding short GBP/USD from 1.3055 into the weekend; keeping the profit target at 1.2710 and lowering the stop to 1.2920.
With ECB chief Mario Draghi scheduled to speak later today, we expect the EUR/USD to keep narrow ranges. This week has been highlighted by massive option expiration from 1.1400 down to 1.1200. We are still holding short from 1.1560 with an initial target of 1.1215 and a 1.1485 stop.
Our suggestion to sell USD/JPY at 114.65 was not filled and we suggest staying on the sidelines into the weekend.
The Aussie dollar maintained its bid tone after yesterday’s domestic employment report printed an increase of 32,000 full-time job and a steady unemployment rate near 5%. This stronger report drew in the usual chorus of market commentators calling for the RBA to shift their bias away from neutral and give some scope for a rate adjustment higher next year.
Considering that wage growth has lagged this year and household debt levels are approaching 200% of income, we believe the RBA will remain on hold throughout 2019.
As such, we still suggest selling into the current bounce. We are currently short from .7225 and suggest adding to short positions at .7270 with an initial target of .6915 and a .7385 stop.
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