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- GBP/USD in new uptrend which is likely to extend
- Trendline and MAs at 1.2700 provide bullish target
- Johnson to meet EU leaders on side of UN General Assembly
- Euro could be driven by PMIs
The GBP/USD exchange rate is trading at 1.2478 at the start of the new week, a marginal 0.22% lower than at the start of the previous week. However, over the course of the past month Sterling has advanced 1.50% and studies of the charts suggest that in the near-term the pair will probably continue to rise steadily as the new uptrend unfolds.
The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair making higher highs and higher lows, and given the old adage that ‘the trend is your friend’ this uptrend is likely to continue.
A break above last week’s high at 1.2582 would confirm a continuation higher to a target at 1.2700.
The RSI momentum indicator is looking a little bearish: after peaking in mid-September it has started to fall.
The fact that the exchange rate has continued to rise whilst momentum has fallen has created a bearish divergence between the two.
It is possible the pair could slow-down and go sideways or even correct back but since the trend is bullish and trend considerations trump all others, the chart still retains a bullish bias overall.
The daily chart shows the pair rising to the trendline at the top of a wedge-shaped pattern.
Given the short-term bullish bias and the steep rise since the start of September, the short-term rally higher is biased to extend.
A break above the 1.2582 September 20 highs would give the green-light to a continuation higher, to a target at 1.2730 at the level of the 200-day moving average (MA), and the upper trendline.
The daily chart is used to analyse the medium-term trend, which is the next week to a month of price action.
The weekly chart shows the pair rising up strongly from the recent key lows.
It has formed a reversal looking candlestick followed by a strong, long, up week.
The RSI momentum indicator is looking constructive after rising relatively strongly out of the oversold zone.
The pair is showing the potential to continue its recovery up to an initial target in the 1.27s at the level of the 50-week MA and the top of the wedge pattern it is in.
This could be followed by a potential move up to 1.3000 thereafter, should the pair successfully break out from the wedge.
The weekly chart is used to give an idea of the longer-term outlook, which includes the next few months.
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The Pound: Johnson to Make Fresh Brexit Bid in New York
The main focus for markets will be ongoing progress towards a Brexit deal between the UK and EU after what appeared to be some breakthroughs last week, and an improvement in the negotiation ‘mood music’ around Brexit.
On Thursday, European Commission president Jean Claude Juncker said, “we can do a deal” in an interview with Sky News, encapsulating the mood of optimism.
His comments on the Northern Ireland backstop are however perhaps the most notable in that he suggests he is open to dropping the clause that has proven to be the most problematic element of the existing Brexit Withdrawal Agreement for the UK side.
Juncker said a 'no deal' Brexit would have "catastrophic consequences" and said he was doing "everything to get a deal".
He said did not have "an erotic relation" Northern Ireland backstop, adding he was prepared to remove from a withdrawal agreement, so long as "alternative arrangements [are put in place] allowing us and Britain to achieve the main objectives of the backstop. All of them".
Prime Minister Boris Johnson aims to spell out further details surrounding the UK's proposals at the UN General Assembly, to be held in New York from Tuesday September 24.
Johnson will reportedly speak to Donald Tusk, the President of the European Council, as well as French, German and other EU leaders on the sidelines of the UN General Assembly in New York.
Analysts at Moneycorp, a currency broker based in London, say a potential resolution to the Irish border question could go a long way to calming investors’ fears over a 'no deal' Brexit:
"The Pound is continuing its recovery against the Euro, following reports that Prime Minister Boris Johnson will reveal an alternative solution to the Irish border issue at the UN next week. GBP/EUR reached a three-month high in reaction of ongoing progress."
Another key event will be the decision of the Supreme Court over whether it was lawful for Johnson to prorogue Parliament. This is likely to come at the start of the week according to the presiding judge Lady Hale.
The impact on the Pound is likely to be volatile but probably short-lived: if the decision is that Parliament was unlawfully shut-down and MP’s are able to return it will make it easier for them to stymie a ‘no-deal’ Brexit, which could give Sterling some further support.
The Pound's rally since mid-August has largely been built on a reassessment by the market that a 'no deal' Brexit had become increasingly unlikely owning to the decision by Parliament to effectively outlaw such an outcome.
If the decision goes the other way, the Pound may weaken as it will give the government the upper hand, as well as setting a legal president.
However, it is arguable that Parliament has already achieved its objectives in tying the Prime Minister's hands on the issue of 'no deal' therefore we would expect the impact to ultimately be limited.
Meetings also appeared to go well between the UK’s brexit minister Stephen Barclay and EU chief negotiator Michel Barnier.
Barclay said they had had "serious detailed discussions" and things were "moving forward with momentum", whilst Barnier commented that “it had been a "cordial" meeting, but "lots of work has to be done in the next few days", according to reports from the BBC.
Others were more sceptical: the prime minister Boris Johnson said that whilst there had been “progress” it was important not to “over-exaggerate”.
Irish foreign minister Simon Coveney said there was a "wide gap" between the UK and the EU, with Brussels "still waiting for serious proposals" from London.
Leaked comments from Brussels concerning the UK’s proposals suggested a gulf remained between the two, after a memo from the European Commission confirmed British proposals for replacing the Irish backstop "do not amount to legally operational solutions and would have to be developed during the transitional period".
Clearly, if there is more progress on a deal it will be beneficial to the Pound.
The U.S. Dollar: What to Watch
The main drivers of the U.S. Dollar in the week ahead are increasing concerns about liquidity constraints in the Dollar funding market, the negative impact of the yield curve inverting, economic data and an apparent drying up of global dollar liquidity.
A lack of money-market U.S. Dollar liquidity actually boosted the U.S. Dollar temporarily last week and the same is possible in the week ahead.
The demand for short-term credit peaked as businesses sought short-term loans to pay their taxes (tax day was on September 15), investors borrowed to buy U.S. government bonds, and the U.S. Treasury started rebuilding its emergency account.
This lack of ‘supply’ could persist supporting the Dollar in the week ahead, however, one of the factors, the tax deadline has passed.
Another potential risk factor for the Dollar is that the yield curve is inverting again as a result of the drone strikes in Saudi Arabia, pushing up demand for long-term U.S. treasury bonds, whilst expectations of deeper Federal Reserve rate cuts to the lower end of the curve have not materialised.
The yield curve describes the curve drawn by connecting the interest rates on loans of many different lengths, from overnight loans to loans of 30 years. Usually, rates are higher on longer-term loans but occasionally they invert, and this is negative for the Dollar and dangerous for the economy - it is also viewed as a reliable early warning indicator of recession.
On the data front, the main releases are on Friday when the Fed’s favoured inflation gauge, the personal consumption expenditure index (PCE), is released along with durable goods orders.
The PCE is forecast to show a 0.2% rise in August from July and a 1.8% rise from a year ago (last August), which would be higher than the 1.6% in July when data is released on Friday at 13.30 BST.
Despite having long been seen as a bugbear for the economy inflation tends to support the currency by pushing up interest rates which attract more inflows of foreign capital.
A higher-than-expected result is likely to push up the Dollar whilst vice versa for a lower-than-expected result.
The same goes for core durable goods - or high price-tag capital goods - which are forecasted to rise 0.2% in August when data is released at 13.30 from -0.45 previously.