ECB & BOE In Focus As Central Banks Head Back After Summer Break

Back To School & Brexit

As financial markets start to grind back into action after the quieter summer period, one of the main stories dominating news wires is that of UK politicians voting on the EU Repeal Bill. UK PM Theresa May cautioned last week that the UK could be facing a Brexit “cliff edge” if parliament failed to support her EU Repeal Bill which will be debated on Thursday.

May’s task of pushing through the repeal bill is not an easy one as she has only a slim majority in parliament as part of the conservative-DUP pact following the snap election in June. If Parliament rejects the repeal bill, there is likely to be some volatility as markets adjust their position on Brexit while if the bill is passed, as expected, there is unlikely to be much GBP topside

The political environment, specifically regarding Brexit, has been a key determinant of price action over the year. However, following, commencement of Brexit negotiations it’s likely that negative headline slinked to Brexit have been factored into the price action. As such, the more important driver of price action over the coming month is likely to be the BOE and the ECB.

Fighting Forces Stifling GBP

Following a decline over August, GBP has started to recover against the US Dollar as markets have begun pricing out a December US rate hike, leading to broad USD weakness. Furthermore, the recent US employment reports, which showed weakness in both the headline NFP and wage-growth put further pressure on the currency which has been trading lower in response to five consecutive CPI misses.

While the subdued USD environment and outlook is likely to be a supporting factor for GBP, data weakness and political uncertainty should provide a cap on any upside. Data released last week showed that UK construction fell to a one-year low in August as Brexit uncertainty has caused a drop in investment in the commercial sector.

 

The technical landscape in GBP/USD points to the risk of a downside break with a potential head and shoulders formation developing within the broader rising wedge pattern which has framed action this year. A break of the summer low at 1.2764 should pave the way for a deeper move toward the 1.2580 low which is likely to act as support on the first test.

ECB Fuels EUR Rally, But Are Expectations Premature?

EUR has been tearing higher against GBP this year as investors ramped up their expectations for the announcement of further QE unwinding at the upcoming September meeting. Steadily improving economic data over the year has bolstered the ECB’s view that the eurozone recovery is in full flight.

However, the bank has recently warned that underlying inflation is yet to make it back to target and that EUR strength is having a dampening effect. In light of these comments, it seems reasonable to assume there is now a greater risk of the ECB refraining from any policy adjustment at this meeting which they might instead use to further talk down EUR, waiting to reassess the situation in October when they meet again.

 

After breaking out above the .9149 level which was the prior 2017 high and the mid 2009/2010 high price stalled at a test of trendline resistance running from the 2013 and 2016 highs. Price subsequently fell back to retest the broken .9149 which has so far held as support. This is now a pivotal level for the pair. A breach back below this level should pave the way for a deeper correction lower, while, intact, the focus remains on further upside. The next key resistance will be a test of the 2009 high at .9416.