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Crunch time for GBP and Brexit
Summary: A mixed US jobs report hasn’t been enough to further boost the dollar outlook to start the week. If the greenback can’t get something going early this week, reversal risk mounts quickly. But the chief focus this week will be on sterling as key Brexit votes, including on May’s deal and whether to delay the Article 50 deadline, loom large.
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.
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.
The G-10 rundown
USD - note that the US has set its clocks forward for summer time, so data for those regions that don’t adjust and those that won’t for another few weeks will see different release times for economic data. Today’s January US Retail Sales will be a bit more interesting than usual after the disastrous December figures.
EUR – important for fresh selling in EURUSD to come in ahead of 1.1300 to maintain the downside focus. Any upside can only be about negative catalysts elsewhere, in our view.
JPY – a positive mood to start the week offers JPY bulls a chance to get involved at better prices. Consider EURJPY ahead of 126.00 or AUDJPY ahead of 79.00.
GBP – sterling risks abound for the short and medium term unless May is able to pull off a miracle and delivers a deal. Even clarity later this week that no deal will be avoided could see sterling continuing to trade on the defensive.
CHF – disorderly moves in GBP could have repercussions here, though the Swiss National Bank will be on high alert. Awaiting a EURCHF move beyond 1.1200 or 1.1500 before paying much attention here.
AUD – NAB business survey is up tonight. We’re no fans of the Aussie, but wonder if downside traction is possible until we get to the other side of whatever the US and Chinese negotiators are set to deliver on the trade deal.
CAD – USDCAD digesting the sharp rally from the sub-1.3200 levels. Tactically, CAD bears may look to work a better price toward 1.3350 to get involved on the long side again.
NZD – AUDNZD trending lower and the failure of the latest pivots points to exploration of the full extent of the range down to the 2016 low just below 1.0250. The modern all-time low was just above parity back in early 2015.
SEK – churning price action between 10.50-10.60+. SEK is so very cheap, but the last two sell-off attempts led nowhere. Tomorrow’s Sweden CPI could be pivotal.
NOK – the stronger than expected CPI sets the tone for NOK, although it is idiosyncratic and likely linked to NOK weakness more than any risk that inflation is set to pick up further. For now, the immediate focus is the EURNOK reversal after Friday’s squeeze.
Upcoming Economic Calendar Highlights (all times GMT)
• 12:30 – US Jan. Retail Sales
• 23:00 – US Fed’s Powell to Speak
• 00:30 – Australia Feb. NAB Business Survey
USD - note that the US has set its clocks forward for summer time, so data for those regions that don’t adjust and those that won’t for another few weeks will see different release times for economic data. Today’s January US Retail Sales will be a bit more interesting than usual after the disastrous December figures.
EUR – important for fresh selling in EURUSD to come in ahead of 1.1300 to maintain the downside focus. Any upside can only be about negative catalysts elsewhere, in our view.
JPY – a positive mood to start the week offers JPY bulls a chance to get involved at better prices. Consider EURJPY ahead of 126.00 or AUDJPY ahead of 79.00.
GBP – sterling risks abound for the short and medium term unless May is able to pull off a miracle and delivers a deal. Even clarity later this week that no deal will be avoided could see sterling continuing to trade on the defensive.
CHF – disorderly moves in GBP could have repercussions here, though the Swiss National Bank will be on high alert. Awaiting a EURCHF move beyond 1.1200 or 1.1500 before paying much attention here.
AUD – NAB business survey is up tonight. We’re no fans of the Aussie, but wonder if downside traction is possible until we get to the other side of whatever the US and Chinese negotiators are set to deliver on the trade deal.
CAD – USDCAD digesting the sharp rally from the sub-1.3200 levels. Tactically, CAD bears may look to work a better price toward 1.3350 to get involved on the long side again.
NZD – AUDNZD trending lower and the failure of the latest pivots points to exploration of the full extent of the range down to the 2016 low just below 1.0250. The modern all-time low was just above parity back in early 2015.
SEK – churning price action between 10.50-10.60+. SEK is so very cheap, but the last two sell-off attempts led nowhere. Tomorrow’s Sweden CPI could be pivotal.
NOK – the stronger than expected CPI sets the tone for NOK, although it is idiosyncratic and likely linked to NOK weakness more than any risk that inflation is set to pick up further. For now, the immediate focus is the EURNOK reversal after Friday’s squeeze.
Upcoming Economic Calendar Highlights (all times GMT)
• 12:30 – US Jan. Retail Sales
• 23:00 – US Fed’s Powell to Speak
• 00:30 – Australia Feb. NAB Business Survey