Key Points:
- Cable facing volatility as Bank of England and FOMC decision looms.
- Watch for sharp volatility following the risk events.
- Expect further political risk until Theresa May can form a government.
The Cable had a particularly rough week as the currency pair reacted to a surprising result from the UK election which saw the conservatives lose enough seats to cause a “hung parliament”. Subsequently, the market was shocked and the pair collapsed back below the 1.28 handle to close the week at 1.2741. Subsequently, it makes sense to review last week’s chaotic events with a view to assessing the looming risks as the FOMC gets ready to rule.
Last week was particularly volatile for the Cable as the UK general election result brought with it a sharp surprise for the markets. Rather than a victory for the Theresa May led conservative government, it actually proved to be a veritable rout and resulted in a “Hung Parliament”. This subsequently caused the Cable to decline sharply by around 200 pips and resulted in the pair closing the week well down at 1.2741. Ultimately, it still remains to be seen if Theresa May will be able to form a government in the coming week and this means plenty of volatility for the Cable moving forward.
Looking ahead, besides the ongoing political risk, there is plenty of volatility looming for the Cable in the week ahead. In particular, both the Bank of England and the U.S. Federal Reserve are getting set to determine their interest rates and this could bring with it some surprises. The U.S. Federal Reserve’s FOMC has proved relatively poor at setting expectations ahead of the meeting so it is currently anyone’s guess as to whether the central bank will follow through on their recent rhetoric and lift interest rates. However, given some of the recently poor U.S. economic figures, the risk of further dovishness is relatively high. In contrast, the Bank of England is dealing with rising inflation rates and, although they are unlikely to lift rates, there could be some relatively hawkish rhetoric following the event. Subsequently, it’s highly likely that the Cable will suffer some bouts of volatility as those decisions are released.
From a technical perspective, last week’s sharp fall likely suggests that the consolidation from the 1.30 handle has ceased and we are now moving towards further downside momentum. In addition, the RSI Oscillator still remains within neutral territory and has further space to move before becoming oversold. Subsequently, our initial bias remains on the downside for the coming week with the caveat to watch for volatility from the FOMC decision. Support is currently in place for the pair at 1.2707, 1.2632, and 1.2512. Resistance exists on the upside at 1.2906, 1.2977, and 1.3045.
Ultimately, fundamental and political risk is likely to dictate the Cable’s near term trend as the Fed and BOE both get set to meet to determine their respective interest rates. Subsequently, the pair is likely to have a relatively bumpy week, until these events are ironed out, so monitor the results closely as they are released.