Pound Sterling slipped is under notable pressure at the start of the new week as foreign exchange markets resign themselves to the fact the UK is to exit the single market.
The Pound to Dollar exchange rate fell from the week's opening level at 1.2254 to 1.2187 as markets digested Prime Minister Theresa May's much-watched weekend interview in which she confirmed her Government would be looking to take back control of the UK's borders once the country exits Europe.
This suggests the Government is willing to forfeit membership of the single market, access of which requires the free movement of European citizens.
Note that GBP/USD has not closed below 1.2160 in 2016, therefore Monday's close will be incredibly important - if the rate does close below here we could be about to wintess a fresh impulse lower. If the level is defended then a rebound back towards 1.24 could occur.
"Sterling has started the week on a soft tone following Theresa May’s comments over the weekend, which have been viewed as her reverting back towards a ‘Hard Brexit’ tone, with immigration seemingly taking priority over membership to the single market," says a note from Barclays to their business customers, seen by Pound Sterling Live.
"GBPUSD has broken below trend line support at 1.2225 and recent 1.2200 support. Our traders see 1.2083 as the next target support level, the post flash crash low, followed by 1.2000," say Barclays.
According to economists, exiting the single market leaves the UK open to a longer-term economic growth rate that is below potential.
Of course these economists could well be wrong - the UK could do well outside of Europe, particularly if exiting the Union allows for the introduction of more business-friendly policy making and the achievement of strong ex-EU trade deals.
However, for now, the bet is that growth will be lower, and therefore the Pound is seen struggling amidst the uncertainty.
"Independent GBP weakness is the main theme overnight. GBP/USD is just below 1.22 and EUR/GBP above 0.86 after PM May said in a weekend interview that she was not interested in 'keeping bits of [EU] membership,' a comment widely interpreted as indicating that the UK will leave the single market when it leaves the EU," says Adam Cole, an analyst with RBC Capital Markets.
Those with foreign exchange payments are looking at a GBP-USD exchange rate that ranges between 1.1757 at the banks towards the late 1.20s offered by independent specialists who are more competitive on the spreads they offer.
Technical Studies Favour More Downside
Looking at the GBP/USD chart we can see that Friday’s Dollar gains resulted in a big red down day for GBP/USD as the number of Dollars a Pound buys fell.
Whilst the downtrend is likely to continue, for more confirmation we would ideally wish to see a break below the key lows at 1.2197-8.
Such a move would open the way down and see the pair falling another 100 or so points to a target at 1.2100, initially.
At that level sits the S1 monthly pivot which is likely to block more selling as it is level traders often expect support and therefore attracts a lot of demand.
The bearish move down is supported by an Elliot wave analysis of the pair, which indicates a 5th Elliot wave down is either in the process of unfolding or is likely to unfold soon.
Fifth waves are always in the direction of the broader trend, which in this case is bearish.
Some well-noted technical strategists are in agreement.
"The short-term bear trend remains intact and the longer-term technical picture looks very unsteady for the pound (see bottom chart). We spot resistance intraday at 1.2175/80 and support at 1.2115. We think a daily close below 1.2175 will tip the balance of risk in favour of a renewed push lower to retest 1.1950/55," says Shaun Osborne at Scotiabank.
Scotiabank favour selling minor GBP rallies from here.
Data to Watch for the Pound in the Week Ahead
The UK Retail Sector may be in need of some of the ‘therapy’ it bestows upon its customers.
Recent data has not been particularly positive and showed lacklustre sales over Christmas, usually a good time for the sector.
The weaker pound is also weighing on margins, as is fierce competition from online new kids on the block ASOS, boden, very and myriad others.
Concerns that the British shopper A) is living on credit and B) unlikely to be able to continue borrowing at the same levels due to signs of job insecurity and higher inflation, means the BRC Retail Sales Monitor in December may gain more interest than usual, when it is released at 00.01 (GMT) on Tuesday, Jan 10.
If it is particularly bad the Pound may retreat.
Also of importance will be Bank of England (BOE) governor Mark Carney’s testimony at the Treasury select committee on Wednesday, Jan 11 at 14.15.
There is a risk Carney may use the opportunity to give markets a ‘head’s up’ of an imminent rate cut according to ING bank’s Chris Turner.
Any such commentary could heavily weigh on Sterling.
Wednesday also sees the release of Manufacturing Production at 09.30 which is expected to show a rise of 0.5% from a minus figure previously.
Industrial Production, out at the same time, is expected to show a robust rebound of 0.7% from -1.3% previously.
The Trade Balance, also out at the same time, is expected to show the deficit widen to -11.4bn in November.
Don’t forget that there is a risk all through January that the Supreme Court may announce its decision on whether Theresa May alone can trigger article 50 and begin Brexit or whether she has to put it to Parliament first.
If she wins the case the Pound is likely to weaken; if she doesn’t the Pound may rise temporarily, but analysts are becoming increasingly sceptical about whether Parliament will have much authority beyond a simple yes/no vote to Brexit.
Previously it had been argued they might have input in the negotiating stance but this seems less likely now according to ING’s Patel, who recently said they would probably just have a “three line Bill” which included a vote on Brexit and no say on implementation.
Data to Watch for the Dollar in the Week Ahead
The message from Federal Reserve speakers is likely to dominate headlines and supply further upside to the Dollar in the coming week.
“We wouldn't be surprised to see some hawkish Fed talk this week, with the intention of preparing markets for the prospects of a 1Q17 rate hike.
Strong US inflation and growth data over the next month will likely see the reflationary uptick in US yields continue and this means a USD buy-on-dips strategy remains attractive,” said ING’s Turner.
Apart from that, the main data release is on Friday when Retail Sales for December is released at 13.30 GMT.
It is expected to show a strong 0.7% month-on-month (mom) rise whilst Core Retail Sales is forecasts to have grown by 0.5% mom.
Michigan Consumer Sentiment is another big release on Friday, and is estimated to come out at 98.5 from 98.2 previously, at 15.00.