Key Points:
- Cable buoyant as market looks past Brexit risk.
- Inflationary pressures rising with the UK.
- Watch for a break of resistance around 1.2569.
The Cable had a relatively historic week with the formal triggering of the Article 50 Brexit provisions causing some volatility for the pair. However, the pair recovered fairly quickly as the market appears to be looking past the Brexit and towards the currently strong inflation figures and the chance of near term rate hikes from the Bank of England. Subsequently, given the looming NFP result, it makes sense to review last week’s event, and what could potentially lay on the horizon for the venerable Cable.
Last week was a historic moment for the Cable as UK Prime Minister May formally triggered the Article 50 exit provisions to start the Brexit process. Although this was largely expected, what was a surprise was the EU’s position that no negotiations on trade will occur until separation procedures had begun and no agreement on trade would be concluded until a full exit had occurred. Subsequently, the Cable was initially under pressure but this quickly reversed because it would appear that the market is largely looking beyond the Brexit risk and is instead focusing upon the strong UK inflation and the increased chance of a rate hike from the Bank of England. Subsequently, the Cable actually managed to finish the week around 50 pips higher at 1.2551.
Looking ahead, the pair is in for a busy week with the primary focus likely to fall upon the UK Manufacturing and Services PMI figures which are forecast at 55.1, and 53.5 respectively. It’s highly likely that those figures will prove to be relatively robust given the strength evident within the UK economy of late. In addition, the U.S. Non-Farm Payroll figures are also due out, late in the week, with most forecasts placing the print somewhere around the 180k mark. However, this is likely to be the hardest figure to forecast, so don’t put too much stock in the market forecasts. The U.S. labour market has been under pressure of late so we could potentially be in for a slightly weaker result than expected. Regardless, both the UK PMI’s and U.S. NFP figures will cause plenty of swings and volatility for the pair in the week ahead.
From a technical perspective, the Cable’s price action continues in a sideways, consolidative fashion and is yet to deliver a clear trend in either direction. The current pattern argues for an extension of the consolidative phase which is also supported by the relatively flat RSI Oscillator. The medium term is largely weighted to the upside but price action is likely to remain trending sideways in the week ahead which means our bias remains neutral. Support is currently in place for the pair at 1.2376, 1.2299, and 1.2197. Resistance exists on the upside at 1.2569, 1.2615, and 1.2705.
Ultimately, the current UK economic conditions appear to be the strongest driver of the Cable’s recent rally. The Bank of England is likely to be increasingly under pressure to hike the official bank rate if inflation continues to creep higher. Subsequently, the Cable is likely to remain buoyant in the week ahead but watch for a sentiment swing back towards the greenback in the event of any jawboning from the Fed’s Janet Yellen.
