- The pound rallies as political manoeuvring in Westminster reduces the risk of a no-deal Brexit
- Over two days, GBP rises 3% against the US dollar
- Manufacturing reports out of the US point to the first contraction in output for several years
- USD – weak across the board. Eurozone manufacturing data not much better
- The market not only expects rate cuts but in the case of the eurozone, receives further indication from the ECB that a cut is on the way
Sterling rallied against the dollar on Thursday, spurred on by the reduced likelihood of a no-deal Brexit. The price move was significant with the currency up 3.2% in the space of two days, two hours.
GBPUSD – Five-day price chart
The movement through the upper trend line ($1.2240) is almost a textbook break out. A burst through stop losses placed just above the trend line was followed by a period of consolidation, then a counter-move to the downside, which also clipped a range of bullish stop losses. The clear-out of stop losses in both directions will leave a lot of scalpers (both bulls and bears) wondering how they managed to make a loss on the trade. Those with wider stops may be celebrating riding at least part of the 3% price move.
Political malfunction spurs on the pound
The UK parliament risks falling into the category of those governing bodies that are best kept away from any serious business. During times of political stalemate in their own countries, the economies of Italy and Belgium have at times thrived. The argument goes that without the interference of politicians to contend with, business leaders can plan and build and bring about growth.
The rally in the pound was fuelled by the opposition parties in the House of Commons managing to gain control of the order book. On Wednesday, legislation was passed to reduce the chance of a no-deal Brexit. On the same day, the incumbent government found itself effectively unable to put through its policy to bring about a snap general election. The attempt was defeated, meaning the hung parliament remains firmly seated.
While there was a bang and a crash as the no-deal Brexit bill was passed through parliament, there appears little chance of any further clarity emanating from Westminster. None of the possible alternative pathways out of the malaise have stepped forward as a front runner. No particular party appears to be able to form an effective government. The move in cable is a reflection of the reduced chance of no-deal Brexit happening rather than the situation becoming any easier to read.
Thursday’s rise in cable signified a breakout to the upside as price broke through the downward trend line – first formed in March/May of 2019.
GBPUSD – year-to-date – break out
The chartists will note a double bottom price pattern and the ease with which price cut through the key resistance levels between 1.19 and 1.22. The daily technical (below) has swung to the buy side, with oscillators and moving averages both pointing to the blue side of the dial.
With price currently printing in the $1.235 area, there is more resistance ahead, but the GBP rise is helped by the dollar, which itself is simultaneously weakening. On Wednesday, USD fell against most of its major rivals (apart from JPY) as investors factored in the increased likelihood of a Fed rate cut following disappointing economic data out of the US.
The Institute for Supply Management reported the US manufacturing PMI (Purchasing Managers Index) declined to 49.1% in August – the lowest reading in more than three years. The number was not only lower than expected but symbolically broke a 35-month-long run of positive data points. Any PMI reading below 50% signals a contraction, and the August number was the first to post below 50% for almost three years.
The pound has rallied against the euro as well as USD:
The pound has broken the key support at 0.90 and recorded fresh two-month lows in the mid 0.8900 region.
The move is partly driven by the reduced chance of no-deal Brexit supporting the pound but also weakness in the eurozone putting downward pressure on the euro. A report from Reuters notes the data out of Germany doesn’t get any better:
“Germany’s export-dependent manufacturing sector remained in contraction in August, a survey showed on Monday, as weaker demand pushed companies to scale back production and cut jobs.”
Desperate times call for desperate measures and the European Central Bank’s future head, Christine Lagarde, signalled a highly accommodating policy is warranted. Lagarde said that the economy would need monetary support “for an extended period of time.” (Source: MarketWatch)
The trading floor analogy that ‘only monkeys pick bottoms’ can help keep traders honest but anyone who was brave enough to go long with sterling this week is looking to have made a good call.
The slide in EUR and USD is driven by underlying weakness in both economic areas and the downward pressure that this will apply on interest rates. German data reports out over the next few weeks are expected to confirm that the country is in a recession.
The rise in sterling comes from the parliament in the UK spewing out what could be its last meaningful policy decision for some time. The government there is now so weak that even if the EU wanted to negotiate terms with it, there would be little chance of finding someone to do it with. In addition, the UK parliament is due to be shut down next week as parties take a break for ‘conference season’.
It appears the outlook for the global economy is that things are going to get worse before they get better.