Crunch time for GBP and Brexit

The US dollar rally found no further fuel from Friday’s jobs report. The chief concern was the very large drop in the nonfarm payrolls change to a mere +20k versus the usual expectations for +170-180k. A very small positive net revision was no real help.

The problem is, as always, that one weak print, especially one after a very strong December print, does not a trend make; 2016 and 2017 saw single months with similar negative surprises. On the more positive side, the household survey was very strong, as the unemployment rate managed to fall back to fall back by -0.2% to 3.8% despite the participation rate remaining near a local high, and the broader unemployment rate fell to match the cycle low at 7.3%.

The Average Hourly Earnings print at a new cycle high of 3.4% year-on-year was less positive as it was achieved through a random 0.1 hour drop in the Average Weekly Hours survey. The market shrugged its shoulders at the data, with the USD finding no additional momentum. Even Federal Reserve chair Powell out speaking twice over the weekend failed add any colour. His interview was largely a PR appearance to defend the Fed.

Trading interest

More interest in longer term sterling downside trades via options. For example, long three-month GBPUSD put spreads with 1.28 and 1.24 strikes (priced around 110 pips this morning with GBPUSD trading near 1.3000).

Long JPY via short EURJPY as long as trading below 126.00. Half a position for now with stops above 126.50. Interest in USDJPY shorts only if seeing broader failure of USD rally elsewhere later this week.

Maintaining EURUSD shorts as long as below 1.1280 (arguably we should have stop above 1.1300 for intraday price action, but we’ll stick with the former).

Maintaining AUDUSD shorts as long as below 0.7080 (as with EURUSD, arguably stops should be higher, above 0.7100 for intraday price action and this is an end-of-day stop).

Brexit

This week will prove pivotal for the Brexit process – or not, once again. Today was supposed to see a vote on Prime Minister May’s deal as last second negotiations are still ongoing, but even this vote could see a delay. Regardless, should this vote fail, and the latest noise from journalists in contact with government officials is that the risk of a failure is high, uncertainty only ratchets higher. In theory, the no-deal scenario is still in play on a failure of May’s deal, but we are more likely to see further votes leading to a delay and even PM May resigning.

Eventually, I would expect the shorter delay to turn into a longer delay; what can we expect 90 more days of negotiations to bring that two and a half years couldn’t? A delay isn’t necessarily good news for sterling if we don’t know whether this delay eventually leads to a referendum and in turn, the outcome of that referendum.

Norway’s CPI for February was far higher than expected, at 2.6% for the core versus 2.1% expected, and 3.0% on he headline. This came a bit late for NOK bulls who were squeezed out of positions on Friday as EURNOK traded above important local resistance around 9.84 – but today’s price action in the wake of the strong CPI gives EURNOK sellers fresh hope if we stay away from that 9.84+ area.

Chart: EURUSD

Last week, European Central Bank president Draghi managed to clear the bar of dovish expectations by slashing CPI and growth forecasts, delaying rate hike guidance to next year and bringing a new TLTRO facility now rather than later. But the sell-off is so far a one-day wonder, and we’ll need follow on selling to keep the outlook to the downside, perhaps to 1.1000 to start. Price action that backs up through 1.1300 would likely quickly weaken downside potential.