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Forex 7 minutes to read

GBP rips higher on referendum hopes

John Hardy

Head of FX Strategy

Summary:  Nowhere is the market's bullishness on GBP more visible than in GBPCHF, which has posted a parabolic rise in the wake of PM May's Brexit defeat Tuesday.


Yesterday we pointed out that risk appetite had reached an important crossroads on a technical basis – whether measured in JPY crosses or equity markets, and leaned towards a resumption of weak sentiment. But instead we got the opposite, as the market has ratcheted trade deal hopes higher on the latest developments and on a potent rally in GBP, driven by Labour leader Jeremy Corbyn voicing support for the idea of a second referendum for the first time. 

On the Brexit front, next steps are on their way early next week as May must declare her 'plan B' to Parliament on Monday and a vote on that plan will take place on January 29. It appears May is not for turning on her original and profoundly rejected deal and supposedly remains against an Article 50 delay request that would likely have receptive ears on the European Union side. And yet the market has waxed dramatically hopefully on Labour leader Corbyn’s that on the referendum issue.

Sterling has room to run technically in EURGBP for another two percent toward the range low of 0.8600 and if it can take out 1.3000 in GBPUSD. But the two chief concerns now for sterling bulls will be whether we head towards an election scenario after all and get a Corbyn government, or whether an about face/second referendum resulting in a narrow vote in favour of Remain triggers widespread civil unrest.

On the US-China trade deal hopes, the boost in sentiment is resting on rather shaky ground. Reports surfaced that US Treasury Secretary Mnuchin has weighed in against tariffs, reports that the Treasury has denied. And increasingly, articles like this one argue the point that China’s immediate challenges remain even if former status quo trade conditions are reinstated. As well, the longer run risk remains of an increasingly hostile relationship over national security and technical transfer concerns – as distilled in the case of Huawei.

The US government shutdown beginning to affect an increasing number of economic data points as a failure to open for business will mean we start to miss releases like Dec. Retail Sales, Dec. Housing Starts and Building Permits, and Nov. Trade Balance reports, among others.

Today we watch whether the risk appetite rally (arguably a bear squeeze) can extend – if so, we’ll be testing important resistance levels soon for JPY crosses – like the 125.00+ area for EURJPY and the 110.00 area in USDJPY. We still look for the turn back lower in sentiment, but yesterday’s extension lowers confidence on near-term timing.

Chart: GBPCHF

We’ve seen a parabolic launch to the upside here for GBPCHF on the change in sentiment toward sterling. This cross likely to show continued high beta to the direction of sterling at the moment as excess strength in the franc was partly down to safe haven seeking on Brexit outcome concerns. Note the 200-day moving average coming into view a bit higher.
Source: Saxo Bank
The G-10 rundown

USD – the greenback weaker against risk-correlated currencies while stronger versus JPY and steady versus euro. Interesting to see the degree to which Federal Reserve expectations creep back higher as the chief driver of the Fed’s dovish pivot have evaporated – only leaving the shutdown as an immediate concern.

EUR – the euro passive as risk appetite strong and heavy EURGBP provides downside pressure. Interesting incoming data next week out of Europe in the form of the German ZEW and IFO surveys and the flash January PMIs.

JPY – the JPY negatively correlating with risk appetite and the Bank of Japan relief on that front may prevent any strong message next week, though the volatility of prior weeks will surely garner a few remarks. 

GBP – the momentum of the rally is compelling, would just remind of the headline risks. Watching 1.3000 in GBPUSD as a clearly important psychological level.

CHF – sterling flows via GBPCHF the chief driver here as the chart has ripped higher as a clearing Brexit situation would remove one of the key pillars of CHF support.

AUD – the flipside of the JPY in expressing enthusiasm for the positive shift in risk sentiment. Let’s not forget the longer run risk of a credit crunch Down Under – but for now AUD looking firm on the charts.

CAD – strong risk appetite and new local highs in oil are ingredients that could drive an extension of the USDCAD sell-off toward 1.3000 – but the relative central bank outlook for the US and Canada hasn’t shifted decisively save for a brief early December spike since last summer.

NZD – AUDNZD trying to get something going above the prior pivot high above 1.0625 and we have pointed the rising odds of a RBNZ cut relative to an RBA cut. One potential decisive event risk for this pair will be next Wednesday’s NZ Q4 CPI release.

SEK – disappointing SEK performance, given the risk appetite thaw and the fact that Swedish short rates are still propped up. EU growth concerns may be weighing.

NOK – backdrop provides the conditions for a more decisive sell-off in EURNOK through the 9.75 pivot area that takes the pair back into the range to 9.50 and then some.
 
Upcoming Economic Calendar Highlights (all times GMT)

• 0930 - UK Dec. Retail Sales
• 1330 - Canada Dec. CPI
• 1405 - US Fed's Williams (FOMC Voter) to Speak on Outlook and Policy
• 1415 - US Dec. Industrial Production / Capacity Utilization
• 1500 - US Jan. Preliminary University of Michigan Sentiment
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