Brexit looming larger than BoE 'Super Thursday'

John Hardy

Head of FX Strategy
John Hardy joined Saxo Bank in 2002 and has been Head of FX Strategy since October 2007. He focuses on delivering strategies and analyses in the currency market as defined by fundamentals, changes in macroeconomic themes, and technical developments.

The Bank of England Super Thursday (decision, minutes, quarterly inflation report, and Governor Carney presser) today is the immediate focus for sterling, and comes with near-universal expectations for a “dovish hike” that will see little shift in forward guidance. 

Driving the decision to hike have been higher CPI and especially wage inflation. UK rate expectations have actually picked up over the last week, but this may be more linked to hopes that the Brexit narrative could soon reach a breakthrough rather than anything the BoE will say today. At the margin, a single dissenting vote is hawkish at the margin, as opposed to the expected two dissenting votes.

In other UK news, there are signs of a thaw on the EU side in Brexit negotiations. The EU’s Barnier has been given more flexibility to negotiate a deal and that there may be a method to avoid a “cliff edge” Brexit. The FT ran a story (paywall) this morning discussing a shift in Merkel’s stance (possibly as with the immigration issue) prompted by CSU leader Seehofer’s objections to Barnier’s inflexible constraints. 

Prime Minister May will meet with Macron tomorrow, and headlines from this meeting have the potential to put sterling on a recovery path if he also shows signs of a thaw in his stance. The FT article points out that the geopolitical backdrop from the EU perspective has shifted considerably since the Brexit vote, with Europe looking more isolated due to the weakening goodwill within the Nato alliance driven by the spectre of the Trump presidency. 

Security considerations, i.e. the UK’s more robust (relative especially to Germany) military presence, loom perhaps as large as economic considerations in weighing likely Brexit outcomes.

The Turkish lira suffered a fresh bout of weakening yesterday as the US announced sanctions on Turkish government officials on Turkey’s handling of a US pastor on Turkish soil. Turkish president Erdogan is striking the usual defiant stance – no surprise there. Concerns on the viability of Turkey’s finances given the political and the structural backdrop of Turkey’s foreign currency-denominated exposure could continue to drive TRY weaker, and default odds have ratcheted to new highs this morning, with the Turkish sovereign CDS’ trading near 340 points.

Chart: EURGBP

Is something brewing in sterling? The recent marginal drop in sterling versus the single currency on Brexit uncertainties has dominated the narrative recently, but real progress on Brexit driven by a shift in the EU’s approach could finally throw sterling a rope here.

Source: Saxo Bank

The G-10 rundown

USD – US dollar in reasonable shape after copy-and-paste exercise from the FOMC late yesterday. Seems strong US data through the Friday payrolls and earnings numbers could drive some more USD firmness here.

EUR – euro struggling today and EURUSD looking for downside triggers between 1.1600 and all the way to 1.1500.

JPY – JGB yields tread water overnight and deserve attention as the possible driver for global bond markets if the 20 basis point assumed ceiling for the 10-year JGB comes under pressure. EURJPY looks bearish after yesterday’s reversal, while USDJPY is struggling, but has been supported by the firm USD.

GBP – as we note above, the BoE may not surprise with a dovish hike scenario, but the market could get interested in bidding up sterling a bit on hopes that the May/Macron meeting will produce a further thaw in Brexit negotiations – EURGBP needs to dip below 0.8800-25 into early next week for a solid technical sign of a turnaround.

CHF – some risk-off driving a fresh dip in EURCHF here? Certainly Asian stock markets have been striking a sour note in recent days – more downside risk south if the risk-off worsens.

AUD – Australia has to be vulnerable on the trade war theme and/or on a further dip in global risk appetite (and risk appetite in Asian markets, which is already very poor). Next Tuesday’s RBA unlikely to produce anything of interest – the RBA not hiking any time in the foreseeable future. Technically, bears need a 0.7300 break in AUDUSD to refresh momentum.

CAD – USDCAD just can’t seem to take out that 1.3000 level as the USD has firmed again – the bears may not give up tactically until the pair closes back above 1.3100.

NZD – the kiwi looks passive to the goings-on elsewhere and is vulnerable at the margin on weak risk appetite. NZDUSD has stayed away from the upside pivot area around 0.6850 and is some way from the break levels lower.

NOK and SEK – failing to see what moves the needle here, but perhaps both vulnerable at the margin as long if gathering clouds on risk appetite turn into a storm.

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