GBPUSD in late play on Chequers

GBP/USD in late play on Chequers

Summary

Sterling has a volatile week to look forward to.

Sterling winning on Chequers

The pound joined in as the tilt against the greenback went up a gear after Friday’s U.S. wages miss. For increasingly reassured sterling bulls, attention was then back on the main risk to a 1.7% rise off 7 ½-month lows. A cabinet meeting at the PM’s official country ‘retreat’ could turn out to be a true test of whether gains are underpinned by sentiment and not just reflective of a down phase in the dollar’s upward grind.

May claims collective victory

Details were beginning to seep out as the U.S. session wound down. PM Theresa May claimed a “collective” victory with cabinet backing for a blueprint on a new free trade area. The system still essentially leaves services and financial services in the cold. Whilst sterling against the dollar doubled a 30-pip gain on the news, odds that pound buyers may end up amongst disappointed parties remains high enough. The EU’s Chief Negotiator Michel Barnier earlier noted “too many questions and too few answers.” That implied the latest customs compromise could still face hurdles in Brussels. Meanwhile, sparse details of the plan released so far read just as much as a recipe for continued cabinet rancour as earlier versions. No key Brexiters resigned on Friday, but Eurosceptic insiders had yet to speak.

Tough response possible to ‘soft’ option

Considering risks that rebels may yet interpret the blueprint as ‘soft’, sterling implied volatility is remarkably relaxed. It’s possible distractions of the week, including Britain’s eye-catching World Cup performance have widened errors in risk pricing. Most volatility market participants aren’t prepared for will appear early on Monday. Meanwhile, demand for the dollar as haven from trade tensions and creeping liquidity pressures for EMs should keep the greenback’s down cycle relatively short. Next week’s possible triggers include U.S. inflation, the Bank of Canada decision, and UK factory data.

Sterling inches up to key range

With buyers in control, sterling chart watchers focused on its latest attempt on the $1.3298-3314 range. The higher end was defined by 22^nd June’s failure high, with GBP/USD getting as close as $1.3292 four days later. The latter echoed intermediate peaks eleven days before hand and was just two pips above Friday’s high. As much as the range is a challenge to overcome though, it’s also a volatility signal. All short-term average were tilting lower at the end of the week. A spike into the range looks likely just ahead. But sterling’s overall weak tone suggests a false break followed by rapid backsliding are a distinct possibility.