Brexit-hit pound stages modest rebound on manufacturing surprise
Fawad Razaqzada October 3, 2016 12:20 PM
News that the UK manufacturing activity in September hit its highest level since June 2014 has provided a welcome relief for sterling. The pound had tumbled to a new post-Brexit low against the euro earlier this morning after UK Prime Minister Theresa May said that Article 50 will be triggered no later than March 2017, which would see the UK leave the EU in 2019.
News that the UK manufacturing activity in September hit its highest level since June 2014 has provided a welcome relief for sterling. The pound had tumbled to a new post-Brexit low against the euro earlier this morning after UK Prime Minister Theresa May said that Article 50 will be triggered no later than March 2017, which would see the UK leave the EU in 2019. Unlike the pound, the FTSE 100 has rallied 1% to climb to its highest level since June 2015. The UK stock market has been supported by a weaker pound, which benefits exports, and rallying oil prices with Brent moving north of $50 a barrel again.
According to Markit’s purchasing managers’ index (PMI), Britain’s manufacturing sector defied expectations again in September. The PMI expanded at a solid pace of 55.4, up from 53.4 record in August and easily beating expectations for a reading of 52.1. Britain’s other important PMIs will be released later this week, with the construction sector PMI due for release on Tuesday, followed by the most important services sector PMI on Wednesday. The downbeat sterling will need these PMIs to also post strong readings for September if it has any chance of making a quick comeback.
Most of pound-negative news is now out of the way
While one could argue that it may be a bit premature to start feeling bullish on the pound again, most of the negative news is out of the way now. We had the initial Brexit vote shock, then the Bank of England’s response in the form of a rate cut and re-introduction of QE, and now we know that the Article 50 will be triggered before April next year. The markets are forward-looking and for sterling to weaken significantly further investors will be keen to find out what the next trigger might be. Specifically, they will be wondering if there will be any further Bank of England interest rate cuts to look forward to. On that front, the BoE’s outgoing deputy, Minouche Shafik, has recently said that it may be necessary to loosen policy further. But she’s a known dove and is leaving in February anyway. Also, if UK data continues to improve like it has over the past several months then there is no need to do that anyway.
Sterling could be close to hitting a bottom
So, the pound may well be very close to finding a base, though at this stage I wouldn’t rule out the possibility for it to weaken a little bit further in the short-term. What this means from a trading point of view is that we could start seeing the dips being bought and rallies sold into, leading to more range-bound activity until probably the buyers come out on top at some point in the near future. The pound’s potential strength could become visible more against currencies where the central bank is even more dovish than the BoE. Against the dollar however it may struggle, especially if this week’s US economic numbers, including the jobs data on Friday, come out ahead of expectations.
Technical outlook: EUR/GBP
Thus, if we see further improvement in UK data the GBP/JPY or EUR/GBP could be a more interesting FX pairs to watch rather than the GBP/USD. The EUR/GBP hit a new post Brexit high of nearly 0.8750 this morning before pulling back a little in response to the positive manufacturing PMI. The key level to watch now is around 0.8725, which was the previous high hit after the Brexit vote. If the EUR/GBP fails to hold its own above this level then we could see the unwinding of bullish positions, leading to a potential sell-off as more and more supports probably break down. However the short-term bias would remain bullish while this level holds as support.
So while the EUR/GBP remains above 0.8725, there is a possibility that the bulls will try to lift the unit towards the Fibonacci extension levels shown on the chart. However if price moves below this level and holds below it then today’s breakout could be considered a false move. In this case, the first bearish objective may be to ‘fill’ the weekend gap above 0.8660. Thereafter, the key support and prior low sits at around 0.8590. If this level breaks too, then we will have our first lower high. If seen, this would be a bearish outcome.
Source: eSignal and FOREX.com.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.