The events of yesterday shocked the global markets as various pairs which had a slight link to China experienced an unfathomable level of volatility. The GBP though showed some stability, holding its ground and gaining against most other single currencies. The GBP is relatively stable right now because it is somewhat less exposed to the risks in China and elsewhere. The current slowdown in China is unlikely to have a high impact on the GBP unlike other commodity currencies, as imports from China only account for 8.7% of the UK’s total imports, while the share of exports is reportedly even less. Whilst other currencies have faced panic and vulnerability over the previous few trading sessions, the GBP has retained stability.
The GBP has outperformed all the major currencies since July and the outlook is for this to continue further because the UK economic data is consistently robust. The recent inflation reading which showed a strong improvement on core inflation has supported sentiment, mainly because it does suggest that those strict views which the Bank of England (BoE) holds on inflation will begin to ease. Overall, the sentiment remains bullish on the GBP and factors such as improved wage growth and a general consistently strong economic outlook will continue to support the currency against its trading partners.
The GBPUSD was trading in an identified range below 1.57 for over a month, but attained a breakout to the upside late last week and the USD weakness gave the perfect opportunity for the GBPUSD to hit a 1.5800 area not seen since June. Despite GBP strength visible across the board, the single currency did show weakness against the EUR. This was only natural as the Euro experienced a paradigm shift due to the pushed back US interest rate expectations, that can really only be linked to it displaying characteristics of a safe-haven instrument.
This week remains relevant for the GBP as second estimates for GDP q/q will be released on Friday, followed by a speech from Carney. With previous attributes such as CPI and Claimant change all meeting expectations, GDP q/q should hit the target of 0.7%. If this does materialize then Carney may provide clarity to market participants and give direction on a possible UK interest rate hike.
Speaking of interest rate hikes, 2015 has been a season where central banks have been tampering with their rates in order to promote economic stability. Regarding the BoE, interest rates will eventually be increased and it is simply a matter of when rather than if. Once this occurs there will be further opportunities to trade a strong GBP with other weaker pairs such as the CAD, AUD or NZD, which all have felt the brunt of the events in China, in addition to internal central bank interest rate cuts. This divergence in monetary policies for the GBP against these pairs generates strong interest rate differentials.
The focus today still remains on the developments in China, the FX markets have attempted to retain some normality, but there was some reprieve as news came out that China cut its main interest rates by 0.25 percentages after two days of turmoil. This has been the fifth cut since November. The cut did promote a bullish move which can be seen within the FTSE100 with a rebound back above the 6100 level. The EURUSD since the move of yesterday has plunged a strong 200 pips to the downside, whilst USDJPY trades back to the 120.50 level. The US session has yet to open, but today's spotlight release will be the CB consumer confidence which is expected to print out positive.
This pair has resided in an extended range for the past trading month with resistance based at 1.5700 and support based around 1.5500. Yesterday's event caused USD weakness which opened a gate for prices to break to the upside. Prices currently reside at the new resistance based around the 1.5800 regions. This pair remains fundamentally flat because of the monetary policy convergences but is technically bullish. The new low high created at 1.5600 holds as the trend-defining level and a breakout above the 1.5800 will open a path to the 1.5900 level. Both leading and lagging indicators concur with the statement above as the MACD trades to the upside with prices finding some support above the daily 20 SMA. The GDP release tomorrow in addition to Carney’s speech may serve an influx of volatility which may aid the GBPUSD bulls.
GBPJPY crashed heavily yesterday as the risk on environment empowered JPY strength. The GBP is fundamentally bullish, but the buying pressure experienced yesterday within this pair caused prices to plummet to lows not seen since May. This pair is fundamentally and technical sideways. Despite the hefty drop yesterday, prices have corrected aggressively today erasing almost 65% of the fall. Even though lagging indicators such as the MACD suggest prices to trade lower, more confirmation may still be needed in order to tamper with this pair. A move below the 186.0 may suggest that the bearish move experienced yesterday was the real deal. Until then it may best to simply observe and see how markets react to the 192.00 level. The range is very wide, though, but this is the GBPJPY.
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