Sterling Remains Locked in The Political Headlights

UK Inflation was weaker than expected on Wednesday and with the BOE announcement a probable non-event on Thursday, Sterling continues to be strapped by Brexit uncertainty.
Stuart Cowell
GBP/USD

Weak UK Inflation Numbers

UK August CPI came in weaker than expected, dropping to a headline rate of 1.7% year/year, down from 2.1% year/year in July. The median forecast had been for 1.9% year/year. Core CPI also abated much more markedly than expected, to a rate of 1.5% year/year, down from 1.9% year/year in the month prior. Input prices showed mostly negative prints, too.

The dip in inflation comes despite a 5%-plus weakening in the trade-weighted value of the pound from August 2018 levels, and despite UK wage growth hitting a near 10-year high recently.

UK yields and the Pound took a turn lower since the release, though the BoE is likely to remain on the sidelines with the Brexit process coming to a resolution, with the outcome and thereby associated impact on the UK economy still uncertain.

Ahead of the UK inflation data, Cable had triggered lower on the simple Crossing Exponential Moving Average (EMA) strategy (H1). The 5-period EMA crossed below the 9-period on the close of the 09:00 candle. The second trigger and Entry was a close below the 20-period moving average (the Bollinger Band mid-line) on the chart below at the close of the 10:00 candle (1.2472).

This approach uses the Average True Range (ATR) to generate target levels, with 1 x the ATR as Target 1 (1.2461) and 2.5 x the ATR as Target 2 (1.24445). At 10:00 the GBPUSD (H1) had an ATR of 11pips. The initial Stop Loss level should be where the market has turned, and this morning it was at the key psychological 1.2500 zone, which is now a 4-day resistance level, following the break of the 20-day moving average on September 4th.

Cable (and most USD crosses) will likely now remain in tight ranges ahead of the FOMC announcement at 18:00 (GMT) where expectations are for a 25 basis point cut and communication that pegs the move more as a mid-cycle adjustment and less as a second cut in a protracted easing cycle.

The BoE policy decision tomorrow is likely to be a non-event, with no-change widely anticipated as their hands remain tied to the political ramifications of the Brexit process.

The UK Supreme Court is currently hearing the government’s appeal on the ruling from Scotland’s highest court that the government’s suspending of parliament was illegal. A decision is expected Thursday or Friday.

Most likely, although not a certainty, it will agree with the recent court rulings seen in England and Northern Ireland, that the matter was “non-justiciable” — being political rather than a legal matter. Most likely, Brexit will be delayed to January 31 and a general election staged in late November or December. The election will presumably be the final Brexit battle.

One of four endgame scenarios will be produced by the election, depending who the victor is, or what possible inter-party alliances or coalitions prevails: 1, a no-deal Brexit on January 31 (which would be the fruit of a possible Conservative-Brexit party coalition); 2, Brexit with a deal and transition phase (the Conservative Party’s preference, though the party would have to win the election outright, which there is potential for, and reach an accord with the EU, which would be an uncertainty); 3, Brexit with a deal and multi-year transition period, but also subject to a “confirmatory” referendum (which is the position of Labour and SNP); 4, Brexit cancelled (which is the position of the Liberal Democrats).

For the Pound, which has been principal conduit of financial market opinion of Brexit, outcome number 1 would be the most bearish scenario, while outcome 4 would be the most bullish.

Stuart Cowell, Head Market Analyst at HotForex

(read our HotForex Review)

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US