Today, in the UK the House of Lords is due to begin its debate over the government’s Brexit bill. The House of Commons has already passed this bill, making no meaningful amendments to it. The House of Lords is expected to approve it as well, with the possibility of any amendments appearing rather low once again. Even if the Lords manage to introduce any changes, those would have to be ratified by the Commons, who have already showed their intentions of not wanting to interfere with or delay the government’s plans. As such, although we may get some interesting remarks from lawmakers over the next few days, the broader Brexit story is unlikely to change much, with the triggering of Article 50 still set to take place late March.
Considering that May’s government appears determined to regain full control of immigration, and that the EU is highly unlikely to grant the UK full access to the single market is such a case, we maintain our view that we may be headed for a "hard Brexit". What’s more, we think that for that to change, it is the UK that will have to back off a little, since the EU is bound by multiple treaties that do not allow much flexibility to politicians and technocrats over the free movement of people. Sterling may react little to any "Brexit" headlines heading into and at the time of triggering Article 50, given that most of the negotiating intentions of both sides could already be priced in. However, in the aftermath of the triggering, EU-UK talks are likely to begin dominating news headlines, and uncertainty with regards to the divorce terms may start to escalate. As such, we believe that any near-term rebounds in GBP are likely to stay limited. We still see as a temporary ceiling for GBP/USD the 1.2850 territory. Nevertheless, our favorite proxy for any potential sterling softness in the foreseeable future is GBP/JPY, bearing in mind that the looming political risks in Eurozone could benefit the yen due to its status as a safe haven.
GBP/JPY tumbled on Friday, braking below the support (now turned into resistance) barrier of 141.20 (R1) to hit the psychological zone of 140.00 (S1) and the upside support line drawn from the low of the 16th of January. Given that the rate is trading above that line, but still below the downside resistance line taken from the peak of the 15th of December, we remain sidelined with regards to the short-term outlook. We would like to see a clear break below 140.00 (S1) before we get confident on more near-term declines. Such a break is possible to open the way for our next support of 138.80 (S2). For now, we see the possibility of a corrective bounce due to short-covering after Friday’s slide, which could stay limited near the 141.20 (R1) hurdle.
RBA February meeting minutes in focus
During the Asian morning Tuesday, the RBA will release the minutes from its February policy meeting. The tone of the statement accompanying that decision was surprisingly optimistic in our view, as the officials basically disregarded the latest mixed batch of data out of Australia. If the minutes confirm that the RBA is indeed as confident on the domestic economy as the statement led us to believe, AUD could come under renewed buying interest. The short-term trend in AUD/USD remains to the upside, given that the pair continues to trade above the uptrend line taken from the low of the 13th of January. Now the rate is testing the 0.7680 (R1) resistance level, where a clear break is possible to open the way for another test near the 0.7730 (R2) zone, defined by the peak of the 16th of February.
The key risk to this view is the possibility of potentially worried comments regarding the strength of AUD. The RBA has repeatedly expressed its desire for a weaker currency and the market has not been paying a lot of attention to that. However, considering our recent experience with the RBNZ’s verbal intervention, we will scan the minutes for any clues on how dissatisfied the RBA is with the recent strength of AUD, and whether it may choose to utilize similar tactics to those of the RBNZ in the future. In case the minutes show more nervousness with regards to Aussie’s exchange rate than the actual statement did, AUD/USD may confirm the negative divergence between our short-term momentum studies and the price action and could fall below the aforementioned uptrend line. Something like that could cause the pair to correct near the 0.7600 (S2) key support.
Today’s highlights
The European day is very quiet in terms of data releases. The most noteworthy indicator we get will be Eurozone’s preliminary consumer confidence index for February, which is forecast to have remained unchanged.
Markets will remain closed in the US and Canada in celebration of Presidents’ Day and Family Day respectively.
As for the rest of the week
On Tuesday, we get the minutes from the RBA’s February meeting, as we noted above. We also get the preliminary manufacturing and services PMIs for February from several European nations and the Eurozone as a whole.
On Wednesday, the main event will be the FOMC February meeting minutes. We think that the market may look through the minutes for extra details on the Fed’s forward guidance and the timing of the next increase in borrowing costs. From the UK, we get the 2nd estimate of Q4 GDP and from Germany, the Ifo survey for February.
On Thursday, we have no major events or indicators due to be released.
On Friday, Canada’s CPI data for January are due out.
