brexit speech and ecb may support further strength in eurgbp 2684592017

Two major events will be the focus in the European region for this week (other than Donald Trump’s presidential inauguration on Friday, 20 January ); U.K PM Theresa May’s official speech on Brexit plans on Tuesday, 17 January and ECB’s monetary policy decision on Thursday, 19 January.

U.K PM Theresa May’s Brexit speech

• Official time has not been confirmed from the PM’s office but market talk has surfaced that it can come as early as Wed, 18 January, 12a.m (Singapore time).
• In the run-up to today’s official speech, PM May’s past media interviews since taking over the helm from David Cameron had hinted on a more hard “Brexit” approach where U.K will leave the EU’s single market and have full control of over immigration as well as not to be bound by the European Court of Justice. Therefore, it will be likely that today’s official announcement will contain more detailed plans on a “hard Brexit” with immigration as top priority and how U.K will negotiate with individual E.U nations over trade deals – short-term negative for GBP.
• Timing of PM May’s official Brexit speech comes ahead of the Supreme Court verdict that is expected to be out before the end of January 2017 on whether PM May’s government is subjected to put out a Brexit bill that is to be approved by U.K parliament before it can trigger Article 50 (the start of Brexit negotiations with E.U).  PM May had stressed in several occasions hat Article 50 will be triggered before the end of March 2017. Thus given such a tight timeline between end of March 2017 and the Supreme Court verdict coupled with rampant on-going speculation that the Government is prepared to lose the Supreme Court case, PM May’s speech today may go for the “full monty” hard Brexit disclosure so that it can be withered down if there is going to be a fierce debate in U.K. parliament – short-term negative for GBP.
• Relative interest rate expectations between U.K and U.S has continued to decline since late November 2016  (U.K less U.S. 2-year OIS rates) and a “confirmed” hard Brexit approach may drive short-term U.K. interest rate expectation lower -  short-term negative for GBP.

ECB monetary policy decision

• In the last December meeting, ECB had surprised by reducing the its monthly Asset Purchase Programme (APP) from EUR80bn to EUR60bn and stretched the QE programme further for another nine months from original scheduled end date of March 2017 to December 2017 (consensus was pegged at an end date in September 2017).
• Latest key Euro zone economic data such as inflation, industrial production and sentiment surveys have been positive where December Inflation had increased to 1.1% y/y, the biggest jump since September 2013. In addition, Industry Production had grown by 3.2% y/y in November where it had inched back up above its 5-year trend growth of 2.2%.
• No major monetary changes are expected in this Thursday’s 19 January ECB meeting and the key focus will be on its central banker, Mario Draghi’s press conference. Any mention on improving fundamentals can set the tone for QE tapering in 2018 after the political uncertainties subside from this year French and German elections -  short-term positive for EUR.

Technical Outlook (1 to 3 weeks) on EUR/GBP

(Click to enlarge charts)

Key technical elements

• The bullish trend in place since 05 December 2016 low of 0.8303 has started to accelerate  as seen from the upside breakout of the upper boundary of the ascending channel (depicted in light green) now acting as pull-back support at around 0.8660 (see 4 hour chart).
• The 4 hour Stochastic oscillator has inched up and still has to manoeuvre to the upside before reaching an extreme overbought level. This observation suggests that the upside momentum of price action remains intact.
• The significant near-term resistance stands at 0.8990/0.9020 zone which is defined by the major swing high area of October/November 2016 and a Fibonacci projection cluster (see weekly & 4 hour charts)

Key levels (1 to 3 weeks)

Intermediate support: 0.8740

Pivot (key support): 0.8660

Resistance: 0.8990/0.9020

Next support: 0.8540 (long-term support)

Conclusion

Therefore as long as the 0.8660 medium-term pivotal support holds, the EUR/GBP is likely to see a further potential up move to target the 0.8990/0.9020 resistance zone.

On the other hand, failure to hold above 0.8660 may negate the preferred bullish tone for a deeper slide to test the 0.8540 key long-term support (the median line of a bullish ascending channel in place since May 2000 low).

Charts are from eSignal

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