Sterling rises ahead of Florence and the Maychine

By Michael Hewson
CMC Markets

Just as US markets marked the end of a 9 day winning streak, markets in Asia started the day in a similar vein before rolling over further after North Korea upped the ante on recent threats by saying it would consider testing a hydrogen bomb in the Pacific.

It followed on from North Korean leader Kim Jong Un saying that President Trump would pay for his speech at the UN as well as the decision to sign another executive order increasing sanctions on the rogue state. This weaker tone is expected to translate into a slightly weaker European open.

If traders were hoping for a strong US dollar rebound in the wake of this weeks Fed meeting, the initial response was certainly encouraging with the US dollar index hitting a fifteen day high in the aftermath. Beyond that the response has been underwhelming, apart from its performance against the Japanese yen where the Bank of Japan showed no signs of easing up on its own easy momentary policy.

It still seems that markets are yet to be convinced that the bullish case for a US dollar rebound has yet to be made. Even if the Federal Reserve were able to deliver on a December rate rise, there is so much uncertainty about what the FOMC will look like in six months’ time, particularly since there are five vacancies that need to be filled, that any projections for three further rate rises in 2018 have to be treated with a huge amount of caution.

As a result we’ve seen both the euro and the pound rebound from their lows, with the pound outperforming after the latest borrowing numbers showed their lowest August number since 2007, largely as a result of higher VAT receipts, while self-assessment receipts also rose to record levels.

Whether the pound can continue its recent rebound is likely to depend on how markets receive Prime Minister Theresa May’s speech in Florence later today, when she is expected to put forward the UK government’s latest proposals to move the currently stalled talks with the EU.

She is expected to make proposals on the rights of EU citizens, as well as making a budget proposal that will ensure that there is no budget shortfall for the remainder of the current EU budget period, which goes up to 2020. The offer is likely to be conditional on continued transitional access to the single market and customs union over the same period, while there could be a request to open talks on trade, something that in the case of the Irish border is interlinked. A transition arrangement would also help in buying more time to come to a more comprehensive deal.

If the markets like what they hear and there isn’t a negative response from the EU then the recent rally in the pound could extend further.

Before the Prime Ministers speech there is some economic data out of France and Germany in the form of the latest September flash PMI numbers for the manufacturing and services sectors.

These aren’t expected to be that much different from the August numbers, with only slight downward adjustments to the headline numbers. Ultimately they are expected to show that economic activity remained fairly robust with French manufacturing expected to come in at  55.6, and services at 54.8.

Germany’s numbers are expected to come in at 59 for manufacturing and 53.8 for services as that country gears up this weekend’s election, where it is widely expected that Angela Merkel will be returned as Chancellor for the fourth time.

While this isn’t in doubt the flavour of any coalition government is and if the FDP find themselves in a position to influence policy, French President Emmanuel Macron may find that some of his grand plans to pool sovereignty on certain issues end up going down a cul-de-sac.

EURUSD – continues to trade in a box range between the mid 1.2000’s and the recent lows at 1.1820, with the potential for a possible triple top, and a 250 point break out. A break below the 1.1800 area is likely to prompt further weakness towards the 1.1600 area, while a move through 1.2100 targets 1.2350.

GBPUSD – the pound continues to look well supported while above this week’s low at 1.3450. We also have support at the 100 week MA at 1.3385. a move through the highs this week at 1.3660, opens up a move towards 1.3755, on the way to a move towards the 1.4000 area.

EURGBP – the 200 day MA around the 0.8700 area remains the next target while below this week’s high at 0.8900. A break of the support area around the 0.8770/80 area, could well be the catalyst for just such a move.

USDJPY – has continued to move back towards the top of its recent range moving up towards 112.90 which is trend line resistance from the highs this year. We now have support back at the 111.70/80 area.