Forex News and Events
Brexit: Gazing at a crystal ball
The pound sterling has suffered a substantial sell-off in December as it fell a massive 4% against the greenback and returned to 1.2260, the lowest level since early November, after hitting 1.2775 on December 6. There has been many discussion regarding the potential effects of the Brexit on the UK economy. Initially, the market braced for the worst, which triggered a debasement of the pound and put investors on the back foot. For now, most economic indicators are holding up as the negative consequences did not kick in yet. However, we expect those negative effects will soon start to emerge against the backdrop of a weak pound and falling business investment.
Indeed, as stated by BoE’s Ian McCafferty, the weak pound will likely translate into an increase in import prices which would inevitably give a boost to inflation. Even though the BoE could tolerate an overshoot above the 2% inflation target, in order to avoid increasing the burden on the economy by tightening its monetary policy conditions, the institution has also to meet its obligations and protect its credibility.
Market participants have recently started to focus again on the upcoming negotiation between the UK and the EU, which has increased the pressure on the pound. We expect financial markets to maintain the pressure on the UK currency as the level of uncertainty has soared again. Indeed, even though UK Prime Minister Theresa May has promised to give further details regarding the government angle of attack before starting the official talks, which suggests that Brexit will happen, there is still a live possibility that the UK stays within the EU. The Supreme Court is expected to rule whether the parliament should give its approval to trigger article 50. And since UK MPs are mostly Europhile, they would likely try to keep Britain inside the EU.
Be ready for a tumultuous start into 2017 for the pound sterling. The Brexit trade will be the trade of the first quarter, try to be on the right side!
Italian banks reveal underlying European regulations drawbacks
Banca Monte dei Paschi di Siena SpA (OTC:BMDPD) has lost more than 15% yesterday at the Italian stock exchange. The bank failed to raise fresh capital and it is very likely now that bank will be nationalized. Yet, European regulations on banks bankruptcy is very strict and the detail of such package appear unclear.
This is why, and our opinion has not changed with the referendum, we still believe that the Eurozone will be forced to help Italian banks. It seems to us that European Institutions cannot take to risk to see uncertainties around the future of the euro area and its currency and this is why we should see in a near future the Eurogroup backing further bailout for the Italian banking sector.
For the time being, the €20 billion requested by the Italian government may not be sufficient. Our hypothesis is that non-performing loans may be underestimated. Years of easy profit and massive risk must not be forgotten. There are officially €360 billion of impaired loans and we consider that this number might be revised higher due to the fact that bank having difficulties are likely to pump up their asset values. The situation appears even worse when realizing that the book value of equity is only 225 billion. In other terms, the banking sector is not even worth all the non-performing loans values. As a result, there is no much options than the nationalization.
The major fear of the Italian government is to avoid a bank run and this is why they are asking €20 billion. It could not ask for more as it could add further turmoil on the Italian markets and having other consequences such as increasing Italian yields. The amount requested is in our view a way to reassure Italian citizens and to gain some time. The Italian banking sector’s troubles are deep and should be a hot topic for next year.
Weakness in US data
US data released yesterday on personal income and spending was significantly weaker than the market had expected. Personal income was flat while spending inch up only 0.2% m/m (adjusted for inflation only 0.1% m/m). However, wages and salaries fell 0.1% m/m which is concerning considered how strong the US labor market is viewed. We continue to see the US in the early stages of a cyclical downturn. Baring significant fiscal stimulus by incoming president trump and corresponding tax reform we suspect that US economic data will continue to erode. With USD at fourteen year high we anticipate a near term correction and realization that betting on a man with no political or policy experience is a hard trade to rationalize (especially while sitting on profits). With volatility declining watch for high yield carry trades fall back into favor. Trades will get further data on the US consumer in new home sales and U. Michigan. New Homes sales should indicate a marginal recovery bounce of 2.1% after steep drop of -1.9 in Oct. However, surging mortgage prices will dissuade buyers moving forward.
Swissquote Strategy Desk would like to wish everyone a happy holidays. 2016 has been a fascinating year, full of unexpected turns. We can’t wait to see what 2017 holds for financial markets. In order be fresh and ready to tackle the new year demands, production of the report will be paused from December 23rd to January 3rd.
GBP/USD - Breaking Support At 1.2302. 
The Risk Today
EUR/USD is pushing higher but remains below 1.0500. The pair has bounced back from hourly support at 1.0367 (15/12/2016 low). Hourly resistance can be found at 1.0499 (22/12/2016 high). Stronger resistance is given at 1.0670 (14/12/2016 high). Expected to see continued very short-term increase. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.
GBP/USD is trading below former uptrend channel. Strong support at 1.2302 (18/11/2016 low) has been broken while resistance lies at 1.2509 (16/12/2016 high). The technical structure suggests further weakness. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY's bullish pressures are still very strong despite some bearish retracements. The pair is heading towards the 120.00 level. Hourly support can be found at 116.56 (19/12/2016 low). Stronger support lies at 114.74 (12/12/2016 low). The technical structure suggests further strengthening. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF is consolidating and remains above 1.0250 which seems a solid base. Hourly resistance is given at 1.0344 (15/12/2016 high). Key support is given at the parity. Expected to further consolidate towards former resistance area around 1.0205. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
Resistance and Support:
