4th January - Cable looks vulnerable
09 January 2017
TECHNICALS:
MONTHLY CHART
The very long-term chart of the Dollar Sterling is best characterized as a multiple top that completed when the market drove down through the succession of lows that began in 1992.
We are below that level (1.35- 1.40) now, but not far below it, and any attempts to rally will soon meet powerful resistance.
So the market is capped.
Note that the triangle that was the catalyst for the break down through 1.35 has already achieved the minimum move it implied. But the move could go much further…
WEEKLY CHART
The solidity of the bear trend is clear in the weekly chart. After the wild price action of June that culminated in the breakdown through the long run Prior Lows, a continuation triangle formed driving the market on down further.
Note that the recent rally has faltered at the resistance from the Prior Low in July 2016 at 1.2796
So the bear trend remains intact with no medium-term signs of a reversal
FUNDAMENTALS:
After the steep sell-off that hit Sterling immediately after the “BREXIT” vote last June and then again in October on fears the UK would pursue a hard “BREXIT”, the Pound has traded in a broad range against the Dollar, so much so that one could be forgiven for thinking the worst might indeed be over. That would be a mistake.
Since the end of June the Pound has been in something of a limbo, or phoney war. Yes, the UK voted to leave the EU, but no negotiations have so far taken place and crucially the Prime minister has revealed little or nothing about how the UK government intends to pursue “BREXIT”.
Not until March 30th at the latest, when the UK Government invokes article 50 will we begin to get a true sense of what “BREXIT” really means for the UK and crucially, the UK economy. There has been much talk about the UK negotiating a so-called bespoke deal, but is that realistic? Are the remaining EU27 going to give the UK the special treatment they denied David Cameron, which if they had would have arguably kept the UK in the EU? We are very doubtful.
In addition, although “BREXIT” has grabbed most of the headlines linked to the EU recently, there are many sub-plots unfolding too. The French are set to elect a new President in the coming months and whoever wins it will not be Hollande as he isn’t standing. In Germany elections are due later in the year. Will the German people punish Merkel for her open door migrant policy? In Italy confusion reigns, after the lost referendum vote. And then there is Greece.
Greece has sacrificed much in recent years to gain EU/IMF financial support and the crisis isn’t yet over. In addition she bears the brunt of the migrant crisis.
We judge the Pound’s current stability is due in large part to there being very little revealed by the UK government about their negotiating stance. And also to the EU Commission’s decision not to discus any aspect of “BREXIT”, even informally, until article 50 is triggered.
We are of the opinion that the UK will have to make a clear-cut choice. Either we must accept free movement of people in order to retain single market access or not. But if free movement is the deal it will go completely against what the majority voted for in the referendum, because above all else the UK leave vote was about controlling immigration. There would be uproar and revolt if that was negotiated away.
Moreover, we wonder if it will prove possible to even negotiate an orderly divorce?
Will the UK accept paying vast amounts to the EU as the cost of leaving? That could mean when the 2 year negotiating period elapses the UK walks away with no deal, how then will it be possible to negotiate a new trading relationship?
Much of this is conjecture, but in the current information vacuum it is all we have. But once the negotiations start and the various positions known, we judge the UK government will to discover the EU is unwilling to bend on its key stance: no free movement, no single market. That will prove bearish for Sterling.
There is another key variable: the incoming President Trump. His economic policies are likely to fuel a strong Dollar rally against the other majors, with Sterling particularly vulnerable.
In summary, the Pound has been supported over the last 6 months by an information vacuum. |But as that void is filled we think the negotiating rhetoric will send Sterling much lower.
Next story:
12th January - What happened to the Oil rally? 
Previous story:
19th December - How much lower for Gold?