Sterling Recovers as Markets Eye Third Round of Brexit Negotiation

Sterling recovers broadly today as markets are looking at the third round of Brexit negotiation between UK and EU in Brussels.. There are talks that selloff of the Pound is overdone, in particular against Euro. Technically that’s a valid view as the cross, currently at 0.9240, is reasonably close enough to key resistance level at 0.9304 (2016 high). But the recovery in the Pound is so far rather weak and it’s staying near term bearish against Euro, Dollar and Yen. There are still a lot of uncertainties over the outcome of Brexit and we believed that the worst is not priced in yet. There might be renewed selling in Sterling should there be no positive news coming our from the Brexit negotiators.

Davis called for flexibility and imagination

UK’s Brexit secretary David Davis called for "flexibility and imagination" in the talks. And he emphasized that UK wants a Brexit deal "that works in the best interests of both". EU chief Brexit negotiator Michel Barnier warned in an article that UK will have "very practical consequences including on defence and security" after Brexit. Barnier noted that "the British defence minister will no longer be able to sit at the council of defence ministers, London will leave the European Defence Agency and Europol". Neither party touched on one of the biggest deadlock in the negotiation, the divorce bill. It’s reported that EU officials have requested Davis to provide details on their side of the calculation on the bill but so far nothing is provided.

BCC and DIHK urge focus on practical business concerns

The British Chambers of Commerce (BCC) and the Association of German Chambers of Commerce (DIHK) issued a joint statement urging UK and EU to focus on shared economic interests in Brexit negotiations. BCC director general Adam Marshall said that "as Brexit talks continue, it’s clear that companies in the UK and on the continent all want economic issues to rise to the top of the negotiations agenda. There is real business appetite from both sides for a focus on practical, day-to-day business concerns, and a desire for clarity on future trading arrangements." DIHK head Martin Wansleben said that "the terms of exit are still completely unclear. Many of our members are reporting that they are already shifting investments away from the UK in anticipation of these barriers."

BoJ Kuroda: Less need to purchase JGBs ahead

BoJ Governor Haruhiko Kuroda said in a television interview that 4% growth cannot be sustained and "around 2% growth is likely" for the country. He hailed the yield curve control frame work as "well managed" and noted that "despite the wide fluctuation of long-term interest rates in Europe and the United States, Japanese 10-year JGB interest rate has been very flat, around 0 percent." He also noted that the JGB markets are "functioning quite well" in spite of the central bank’s massive asset purchase program. Meanwhile, he pointed out that "since JGBs remaining in the market is going to decline, that means that with one unit of JGB purchase, the impact on the interest rate could be bigger." Hence, "in coming months there will be less and less need to purchase JGBs in order to maintain the yield curve."

On the data front

US trade deficit widened slightly to USD -65.1b in July. Wholesale inventories rose 0.4% in July. Eurozone M3 rose 4.5% yoy in July.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2816; (P) 1.2852; (R1) 1.2911; More…

GBP/USD’s recovery from 1.2773 continues today but it’s staying well below 1.3030 resistance so far. Intraday bias remains neutral with mildly bearish near term outlook. We’re favoring the case that correction from 1.1946 is completed at 1.3267. Below 1.2773 will target 1.2588 key near term support first. Decisive break of 1.2588 will confirm our view and target a test on 1.1946 low. Though, break of 1.3030 will dampen this bearish view and turn bias back to the upside for retesting 1.3267.

In the bigger picture, overall, price actions from 1.1946 medium term low are seen as a corrective pattern. While further rise cannot be ruled out, larger outlook remains bearish as long as 1.3444 key resistance holds. Down trend from 1.7190 (2014 high) is expected to resume later after the correction completes. And break of 1.2588 will indicate that such down trend is resuming.

Economic Indicators Update