Sterling Plummets as Theresa May Steps Closer to Leadership Challenge

Sterling tumbles broadly as another week starts on political concerns. Prime Minister Theresa May’s position is getting shaky as more MPs are getting impatient with her. Brexit Secretary David Davis dismissed EU’s two week deadline and warned that no number nor formula would be provided on the divorce bill. On the other hand, Dollar gains broadly as riding of Friday’s surge in treasury yields. For the time being, most pairs and crosses are stuck in recently established range. But with a heavy calendar ahead, and news on US tax plan, Brexit negotiation and German coalition, volatility is anticipated.

40 Conservatives MPs ready to channel PM May

It’s reported that the Conservatives are getting more impatient with Prime Minister Theresa May. And, up to 40 Conservative MPs are ready to challenge May’s leadership by signing a letter of no confidence. If eight more MPs are going to join, the letter would trigger a vote of no confidence, which could eventually leader to a leadership contest. Situation for May worsened sharply since the shambolic Conservative conference speech. And the list against her grew week by week after loss of Michael Fallon and Priti Patel in the cabinet.

Brexit Davis warned EU: No number or formula on divorce bill

Regarding Brexit negotiations with EU, Brexit Secretary David Davis dismissed the two-week deadline set of EU’s chief negotiator Michel Barnier. Davis said that "in every negotiation each side tries to control the timetable. The real deadline on this, of course, is December. It’s the December council. One of the key sticky point of the negotiation is that according to EU, "sufficient progress" is needed before moving on to the next stage in trade agreement talks. The divorce bill has to be settled before calling the progress "sufficient". But Davis said that the EU "invented this phrase" and "it’s in their control what it really is". Also, he warned EU that "you won’t have a number or a formula before we move on to the next stage".

German Merkel urges compromise in coalition talks

German Chancellor Angel Merkel urged party leaders to show willingness to compromise in the three-way coalition talks. The phase of exploratory talks is nearly completed and the CDU, FDP and Greens are expected to start serious negotiations. Merkel said that "from my point of view, a solution can be reached with goodwill". And, she added that "if this will be achieved, we’ll not know before the end of the week, however." Merkel targets to agree with the coalition partners in principle to move on by November 16. Separately, latest survey by Emnid for Bild am Sonntag newspaper showed support for Merkel’s CDU/CSU dropped to lowest level since October 2011. Only 30% of Germans would vote for CDU/CSU if there were a federal election this Sunday.

Fed Harker: "Lightly penciled in" a December rate hike

Philadelphia Fed Patrick Harker said today that he has "lightly penciled in" a December rate hike. He noted in Tokyo that "removing accommodation is the right next step". He forecast that unemployment will "drop below 4% probably late 2018 or early 2019". And that should "p[ut pressure on wages", thus, lift inflation back to target. But he emphasized the word "should" as "we’ve been predicting this for a while and it hasn’t happened".

RBA Debelle: Solid upward trajectory in non-mining business investment

RBA Deputy Governor Guy Debelle said "there has been a solid upward trajectory in non-mining business investment over the past couple of years." Also, there is starting to be a "change in mindset from the corporate sector around the willingness to invest, around the willingness to hire." And, that "gives you some hope that eventually we might get into a world where we start to see those wage price pressures emerge." But he also reiterated the central bank’s stance to stand pat until upward pressure in wages or inflation starts to emerge.

On the data front

Japan Domestic CGPI rose 3.4% yoy in October. UK Rightmove house price dropped -0.8% mom in November. Germany will release WPI later today. Looking ahead, the calendar is very busy this week and there are a lot of market moving indicators. Here are some highlights for the week:

• Tuesday: Australia NAB Business Confidence; China retail sales, fixed asses investment, industrial production; German GDP; Italy GDP; Eurozone GDP, industrial production. ZEW sentiment; Swiss PPI; UK CPI, PPI; US PPI
• Wednesday: Japan GDP; Australia wage price index; UK employment; Eurozone trade balance; US CPI, retail sales, Empire state manufacturing, business inventories
• Thursday: Australia employment; UK retail sales; Eurozone CPI final; Canada manufacturing sales; US jobless claims, Philly Fed survey, import price, industrial production, NAHB housing
• Friday: New Zealand PPI, business manufacturing index; Eurozone current account; Canada CPI; US housing starts

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.3124; (P) 1.3177; (R1) 1.3241; More….

GBP/USD drops sharply as the week starts. But it’s staying in range of 1.3026/3337 as consolidation continues. Intraday bias remains neutral at this point. Upside of recovery should be limited below 1.3337 resistance to bring fall resumption. Break of 1.3038 will now resume decline from 1.3651 to 1.2773 key support level. However, decisive break of 1.3337 will indicate that pull back from 1.3651 is completed and medium term rise from 1.1946 is resuming.

In the bigger picture, as noted before, GBP/USD hit strong resistance from the long term falling trend line. Current development is starting to favor that corrective rebound from 1.1946 low has completed at 1.3651. Decisive break of 1.2773 will confirm this bearish case and target a test on 1.1946 low next, with prospect of resuming the low term down trend. Nonetheless, break of 1.3320 resistance will restore the rise from 1.1946 for 38.2% retracement of 2.1161 (2007 high) to 1.1946 (2016 low) at 1.5466.

Economic Indicators Update