15th July - Can Cable bounce further
18 July 2016
TECHNICALS:
MONTHLY Dollar Sterling FX chart
The sideways price action of Cable since the Mid eighties has been a trading range 2.00 to 1.35.
The break beneath 1.35 is an important departure whose main feature is a multiple Top formation that has created massive long-term resistance above the market in a horizontal band from the Prior lows. That resistance is basically 1.35 -1.40.
WEEKLY Dollar Sterling FX chart
In the weekly chart there is a completed bear continuation Triangle (minimum bear move implied down to 1.20) , and the beginnings of a bear trend, with resistances above the current level in the market from Prior Lows at
1.3833 and
1.4563/1.4829
Daily Dollar Sterling FX chart
The short-term chart emphasises the resistance above the market at 1.3833.
Though the market is dominated by the succession of horizontal resistances above it, short-term, there is clear scope for a rally higher to 1.38.
But the medium and long-term charts suggest that the market is unlikely to sustain a move to those levels. And the downside has no support until 1.05.
We don’t think the market will necessarily get as far down as that, but the Triangle does suggest a measured move at least as far as 1.20 before the current bear trend implicit in the existing structure runs out of steam.
FUNDAMENTALS:
The UK has a new Prime minister and government committed to carrying out the result of the “BREXIT” vote. We have seen stocks sell off hard, then bounce and then move back into bull territory.
The Pound did sell off against the Euro and the Dollar, but in our opinion, not by as much as many had feared or forecast. It steadied after the initial fall, even though the Bank of England is still minded to cut rates and use monetary policy to stimulate the economy. Though they passed up on the opportunity at yesterday’s (Thursday’s) monetary policy decision.
The likely reason for the Bank’s inaction was that the new Chancellor held talks with the Bank governor yesterday morning to hatch a plan to use fiscal and monetary policy together to ward off recession and stabilise growth. Clearly austerity has gone with the out-going government and the departure of Chancellor George Osborne!
But what does this mean for the Pound?
The low of the recent sell-off was around 1.28, it is now trading around 1.33, clearly the shock of the UK voting to leave the EU has eased a little and the swift installation of a new government has helped enormously. But other factors are at work.
India has already indicated a desire to strike a swift trading agreement with the UK after spending years unsuccessfully trying to reach a deal with the EU that apparently is bogged down over wine and cheese!
Even the US seems willing to strike a swift deal despite Obama’s comments of going to the back of the queue.
Apparently the senior trade negotiator for the US has made it known the US would like to reach a bilateral arrangement with the UK as quickly as possible and Congress is heavily in favour. Obama’s early comments seem increasingly to have been intended to support David Cameron as he sought to encourage voters to remain in the EU.
With India, the world’s fasted-growing large economy and the US, the world’s largest economy both eager to arrange trading deals, the downside of “BREXIT” may indeed be limited. That would help stabilise the Pound.
Moreover, the EU runs a large trade surplus with the UK, it would not be in their interests to slap punitive trade tariffs on the UK for two reasons:
Looking ahead, the UK economy has had a shock, but the authorities are moving to limit the damage.
The threatened austerity budget of George Osborne will never now take place. Instead, there is likely to be a fiscal relaxation with money spent on infrastructure which can only benefit the long term efficiency of the UK economy. Remember mobility of labour and good transport links have always been key ingredients of economic success.
Only time will tell what the future holds for the UK economy and Cable. But for now, as the new Prime minister begins to set out her policies and placing key supporters of “BREXIT” in key negotiating positions, we judge the Pound will probably enter a long period of range trading around 1.28 and 1.33. If a success can be made of the UK’s exit from the EU, a gradual appreciation can be expected thereafter. All of which means that the down side looks increasingly limited.
Next story:
28th July - US Stocks and European Bonds are two bull markets 
Previous story:
9th July - Is this the S&P's break-out moment?