Sterling Trades In A Turbulent Manner

• The British pound surged during the European morning yesterday, ahead of a meeting between EU Commission President Jean Claude Junker and UK PM Theresa May amid expectations about good news regarding a Brexit divorce-bill deal. However, it plunged back down a few hours later, after the two officials announced that despite significant progress, “it was not possible to reach a complete agreement”. The fact that an agreement has not yet been struck could prove of little significance though, as common ground and a deal could well be found in the next days. As such, we expect sterling to remain volatile and headline driven. Should there be a deal on the divorce bill soon, the currency could rise somewhat further. However, we remain cautious about a healthy rally in GBP, as many uncertainties regarding the Brexit deal remain. Specifically, even if the negotiations move on to the more complex subject of trade, there could be new disagreements there, which could keep any rallies in GBP limited.
• GBP/USD spiked higher yesterday, from near the 1.3420 (S1) support level, to meet resistance a few pips above 1.3520 (R1) and subsequently, it retreated. The price structure on the 4-hour chart still suggests that the short-term outlook is positive as such, we would expect the bulls to take the reins again soon and shoot for another test near 1.3520 (R1). If they manage to break above that zone, we could see further upside extensions, initially towards 1.3590 (R2). Moreover, the fact that the rate continues to trade above the uptrend line drawn from the lows of the 2nd of October 2016 enhances the case for Cable to continue higher from a technical perspective. On the downside, a break back below 1.3300 (S3) is needed to signal that the outlook is back to neutral.

RBA remains pat, appears more optimistic though

• The RBA kept its interest policy unchanged today, as was widely expected, while the statement accompanying the decision had a clearly more optimistic tone than previously. With regards to the labor market, officials stated that employment growth has been strong over 2017. Meanwhile, even though the Bank stated that inflation remains low, it removed a sentence from the previous statement that inflation is likely to remain low, indicating some optimism regarding the future prospects for prices. As for the exchange rate, the Bank toned down its language regarding AUD, noting that that “the Australian dollar remains within the range that it has been in over the past two years”. AUD/USD gained ahead of the decision on the release of retail sales data for October, and rose further on the news.
• AUD/USD gained after the release of the retail sales data, and then rose further on the decision, breaking above the resistance (now turned to support) level of 0.7635 (S1). The pair continues to trade between the resistance barrier of 0.7700 (R1) and the 0.7550 (S1) support since the 26th of October and as such, the short-term trend still appears to be sideways. For our view to change to positive, we would require the pair to break above the 0.7700 (R1) level, something that would signal a forthcoming higher high on the 4-hour chart and could open the way for further upside extensions. On the other hand, for our opinion to turn to negative we would need the pair to break below the 0.7550 (S1) level.

Today’s highlights:

• During the European morning, we get the UK services PMI for November and expectations are for the index to have declined. That said, the risks surrounding that forecast may be tilted somewhat to the upside, considering that both the manufacturing and the construction prints surged by much more than expected during the month. A potential positive surprise in the services print, which accounts for the vast majority of the UK economy, could bring the pound under renewed buying interest.
• We also get the final services PMIs from several European nations and the Eurozone as a whole for November, but given that the final prints are expected to confirm the preliminary estimates, any reaction in the euro is likely to stay limited. The bloc’s retail sales for October are also due out.
• In the US, the ISM non-manufacturing PMI for November is due out and the forecast is for the index to have declined, but to still remain at a very healthy level. Even though such a pullback could hurt USD somewhat on the news, the currency’s forthcoming direction will most probably be decided by developments on the tax-overhaul front and specifically, by any progress in the reconciliation process between House and Senate.
• We have only one speaker on the agenda: ECB Governing Council member Jens Weidmann.

GBP/USD

Support: 1.3420 (S1), 1.3375 (S2), 1.3300 (S3)
Resistance: 1.3520 (R1), 1.3590 (R2), 1.3660 (R3)

AUD/USD


Support: 0.7635 (S1), 0.7550 (S2), 0.7500 (S3)
Resistance: 0.7700 (R1), 0.7770 (R2), 0.7820 (R3)