Pound Sags ahead of BoE Inflation Report Hearing, Gold Sinks

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The British Pound had a rocky start to the week after Brexit negotiator Michel Barnier warned that he “strongly” disagreed with key parts of the UK’s Brexit proposal.

Buying sentiment towards the currency deteriorated further on reports that the UK manufacturing sector expanded at the weakest pace in more than two years in August. With Brexit related uncertainty clearly haunting investor attraction towards the Pound and soft economic data rubbing salt to the wound, the outlook remains tilted to the downside.

Much attention will be directed towards the UK’s inflation Report hearings this afternoon where Carney and several of the MPC members are set to testify before the parliament. Investors will be closely scrutinizing any comments revolving around monetary policy, economic outlook and ongoing Brexit developments.  Matters could be worsened for the already battered Pound if Carney talks down rate hike prospects and suggests that last month’s rate hike was a “one and done” move.

The Pound not only remains pressured by Brexit uncertainty but external factors in the form of an appreciating Dollar. As of late, the Dollar has found ample support from safe-haven demand as prolonged US-China trade tensions stimulated risk aversion. Another key driver behind the Greenback’s appreciation is expectation over higher US interest rates this year. The combination of Pound’s weakness and Dollar strength has made the GBPUSD’s outlook bearish in the short to medium term.

Focusing on the technical perspective, the GBPUSD has secured a solid daily close below 1.2900 which may signal further downside in the near term. Prices are trading below the daily 20 Simple Moving Average while the MACD has also crossed to the downside. A breakdown below 1.2820 could encourage a move towards 1.2800 and 1.2730, respectively.

More Pain ahead for EM currencies?

Emerging market currencies have crashed into the new trading month following a painful selloff last week, driven by sharp declines in the Turkish Lira and Argentina peso. No prisoners were taken as the Indonesian Rupiah, South African Rand, Mexican Peso, and many other EM currencies felt the burn. The outlook for EM currencies remains gloomy, especially when considering how turmoil in Turkey and Argentina, global trade tensions, a stabilizing Dollar, and prospects of higher US interest rates all present downside risks ahead.

Commodity spotlight – Gold

Gold bears were back in action this morning thanks to an appreciating US Dollar. The outlook for the yellow metal remains tilted to the downside amid US rate hike expectations and a broadly stronger Dollar. The technical picture illustrates how significant the $1200 psychological level is on the daily charts. Sustained weakness below this level could open a path towards $1185. Alternatively, if $1200 proves a strong support level, prices could venture towards $1213.

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