After a week or so of firming along with improving UK economic data, the last two days has seen the Sterling flows completely dominated by Brexit headlines, and the GBP/USD trade lower.
The Brexit negotiations are rapidly devolving away from economic discussions and focusing more on tactical politics. This has created a dilemma for PM May whose current strategy fails to satisfy both the EU and her Parliament.
It’s fair to say that the single biggest barrier to the progression of a deal is the Irish border issue. On this topic, PM May doesn’t even have the support of her own party as the hard-line faction continues to resist any open border agreement with Northern Ireland … not for economic reasons, purely political.
In addition, over the weekend, EU officials refused to even consider Ms May’s plan for an independent mechanism to exit the union if Brexit talks remain unsuccessful.
The UK data schedule is light, but the two main reports, CPI and Retail sales, could add to the downside pressure later in the week. From a technical perspective, now that the support level at 1.2940 has been broken, we could see some range extension down to the low of the year near 1.2670.
Our trade suggestion on Friday to sell GBP/USD at 1.3055 was filled. We suggest holding short from 1.3055 with an initial target of 1.2710 and a 1.3065 stop.
Similar to the Sterling, the EUR/USD correction ran out of steam last Wednesday near 1.1500 and reverted back into the recent range. The previous low for the year at 1.1300 was broken in early London trade today and the 200-day moving average at 1.1325 will now become resistance on the daily charts.
We continue to hold short from 1.1560 with an initial target of 1.1215 and a 1.1485 stop.
The USD/JPY looks to be gaining some traction above 114.00 and we see scope for another run at the high of the year near 114.60. As the reserve currency of Asia, the JPY will strengthen during times of equity market weakness. As such, we suggest short-term traders can look to sell USD/JPY at 114.65 with an initial target of 112.60 and a 115.35 stop.
The Aussie dollar has lagged the GBP and EUR on the downside as the GBP/AUD and EUR/AUD crosses are taken lower. The AUD/USD bottomed at .7020 on October 27th and traded above .7300 for a few hours last week. We now look at a break of the .7165 level as a signal a high is in place and the .7000 level will be broken over the near-term.
We are still short the pair from .7225 with an initial target of .6930 and a .7375 stop.
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