Today marks the beginning of the Brexit negotiations. Even though there is the likelihood for sterling to be headline-driven, we believe that over the next few days, market attention is likely to remain primarily on UK domestic politics. The deal between the Tories and the DUP is not finalized yet, while it still remains to be seen whether the Queen's speech will pass through Parliament. As such, it is not certain whether Theresa May will even have a seat on the negotiating table in a few weeks, and with what kind of mandate the UK will approach these talks.
On Sunday, Chancellor Philip Hammond noted that he wants to push for a 'jobs first' Brexit, and also rejected the government's previous mantra that 'no deal is better than a bad deal'. We consider these as preliminary indications that the Conservatives' stance to Brexit may have started to soften up. If more government or Tory officials echo similar remarks, then speculation regarding a smoother Brexit could resurface. Combined with a potential Tory-DUP deal that allows May to keep her position, these factors could prove positive for sterling, as political uncertainty dissipates somewhat. The Queen's Speech on Wednesday has the potential to lift some more of this uncertainty (see below). Even though Parliament will not vote on the Speech until next week, we will probably get some fresh indications on what May's government hopes to achieve in the Brexit talks.
GBP/USD traded in a consolidative manner on Friday, staying slightly below the resistance line of 1.2815 (R1). The pair continues to lie above the longer-term upside support line drawn from the low of the 7th of October, and also above the prior downside resistance line taken from the peak of the 6th of December. Nevertheless, it still trades below the key hurdle of 1.2850 (R2) and the short-term downside resistance line taken from the peak of the 18th of May. Therefore, we prefer to wait for a clear break above these key obstacles before we start getting confident that the pair may appreciate in the near term.
RBA June meeting minutes in focus
During the Asian morning Tuesday, the RBA will release the minutes of its June gathering, where it kept its policy unchanged, and maintained a balanced tone overall. Even though policymakers offered very little new information regarding the next move in interest rates, they did appear slightly more upbeat on the labor market, a sector of the economy they had previously expressed concerns about. Market focus may revolve around their views on this topic again, given that the last two employment reports from Australia have been stellar. Even though this may not be reflected in these minutes, as the latest jobs report was released after the June RBA meeting, we think that the Bank is likely to sound more upbeat with regards to the labor market when it meets again, on the 4th of July.
AUD/USD has been trading in a short-term uptrend since the 2nd of June. On Friday, the pair rebounded from near the 0.7565 (S1) support zone and during the early European Monday, it appears ready to challenge the 0.7635 (R1) resistance, marked by the peak of the 14th of June. A decisive break above that hurdle would confirm a forthcoming higher high on the 4-hour chart and is likely to aim for our next resistance of 0.7675 (R2). One the other hand, a rejection from near 0.7635 (R1) and a dip below the uptrend line taken from the low of the 2nd of June could see scope for a test near 0.7565 (S1). A break below that barrier could signal the completion of a double top and perhaps bring a short-term trend reversal.
The economic calendar is relatively empty today. We only have two speakers on the agenda: New York Fed President William Dudley and ECB Governing Council member Jens Weidmann.
As for the rest of the week:
On Tuesday, as we outlined above, we get the minutes from the RBA June meeting. On Wednesday, market focus turns back to the UK, where the Queen's Speech takes place. The Queen will outline a list of laws that the government wants to get approved over the coming year and Parliament will spend the next six days debating these plans, before holding a vote. If Theresa May secures the support of the DUP lawmakers, or if other parties support her policies, she keeps her place as PM. On Thursday, during the Asian morning, the RBNZ rate decision will be in the spotlight. We see the case for a more cautious tone by policymakers. During the European day, the Norges Bank will also announce its decision. On Friday, we get preliminary manufacturing and services PMIs for June from several European nations and the Eurozone as a whole. Canada's CPI data for May are also due out.
Support: 1.2700 (S1), 1.2635 (S2), 1.2515 (S3)
Resistance: 1.2815 (R1), 1.2850 (R2), 1.2910 (R3)
Support: 0.7565 (S1), 0.7515 (S2), 0.7500 (S3)
Resistance: 0.7635 (R1), 0.7675 (R2), 0.7700 (R3)