FxWirePro: Sterling crawls higher towards 1-year highs ahead of BoE and UK CPI data but Brexit residues lingering concern – Stay long hedged in near month tenors

Notable economic data releases and events will be reserved for later in the week. They include the Bank of England policy decision on Thursday, which will be preceded by an expected tick up in consumer price inflation on Tuesday and labor market figures on Wednesday. The Repeal Bill, meanwhile, continues its passage through Parliament, with a vote on the second reading scheduled to take place today to move it to the next stage.

There’s no change this month to the moderately negative prognosis we have set out for GBP. In large part, this reflects the ongoing and prospective fall-out from Brexit for the economy, monetary policy, and the UK’s fragile external position.

Brexit is not so much a source of acute economic or financial stress; it is rather a chronic problem whose true severity will only become apparent over many years. The consequences for GBP will depend upon not only the final complexion of Brexit but also the sheer uncertainty that surrounds this whilst Brexit structures are still being designed and negotiated.

And in this regard, it’s important to recognize that while the UK government now appears to accept the need for a softer transition out of the EU in 2019, the intention is still to re-boot the UK’s economic and political relations with the EU.

This is still liable to entail a relatively hard final Brexit that results in long-term economic disruption, particularly to the services sector, as the UK is intent on controlling free movement of labor which the EU has made clear will be incompatible with participation in the single market. In this sense, a soft transition out of the EU is only likely to defer the economic consequences of Brexit; for this reason, we do not regard it as a bullish game-changer for GBP.

However, the following factors would be the bullish scenarios:

1) The UK government formalizes a lengthy transitional deal with the EU which maintains the status quo for 2-3 years.

2) The economy rebounds to 2%.

3) MPC commentary seeks to steepen the yield curve.

 4) Current a/c deficit shrinks below 2%.

Consequently, we have been foreseeing for a lower high to develop under 1.3270, but the pace of the move through key resistance levels suggests we could retest those highs, if not set a marginal new high. We still view the 1.3250-1.3346 region as significant resistance and ideally the top of a medium-term range. As such, a decline through 1.3120 and then 1.3040/00 supports is needed to suggest a top is developing.

Hence, with a view to arresting upside risks in the near term, we advocate adding long hedges in futures contracts of October month deliveries that cover the above-mentioned risk events, maintain a strict stop at around 1.2989 levels.

Please be noted that this call is exclusively meant for those short term foreign traders who have their invoices in GBP.

Currency Strength Index: While the FxWirePro currency strength index for the Sterling indicates bullish attributes as it flashes +53 (which is bullish) ahead of UK CPI data announcement, while USD has been mildly bullish by flashing +38 (while articulating).

For more details on our index please visit below weblink:

http://www.fxwirepro.com/fxwire/currencyindex

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