Mid-Day Report: Sterling Weakness Continues on Scotland Uncertainties

Sterling weakness is the main theme in an otherwise quiet start of the week. GBP/USD gapped lower and dived to as low as 1.6102 and stays soft in early US session. GBP/JPY breached the key medium term support level of 169.53 but before recovering. A focus will be on whether GBP/JPY would sustain below this level to confirm larger bearishness. The pound also extended recent down trend against commodity currencies including Australian and Canadian dollar. While the pound also weakened against Euro, EUR/GBP is being held by 0.8035 near term resistance for the time being.

The pound was sold off on increasing uncertainty over Scotland’s independence. According to a YouGov poll released on Sunday, support for independence of Scotland jumped again to 51% and surpassed the anti-exit camp for the time since the referendum campaign begins. Economists noted that the chance of independence now drives a “steep rise” in financial uncertainties”. A key concern is, in case of independence, how London and Edinburgh are going to share related assets and liabilities, as BoE’s role of the lender of last resort to Scottish banks. There were even talks of an “abrupt” out flow of bank deposits from Scotland within days of Yes result in the referendum.

UK chancellor of exchequer Osborne said over that weekend that a plan of actions will be announced in the next few days to “give more powers to Scotland; more tax powers, more spending powers, more powers over the welfare state.” And, major focus will be on whether such measures could turn the tide. But most likely, all the uncertainties would at least continue to pressure the pound until the vote on September 18.

Elsewhere, Canada building permits rose 11.8% mom in July versus expectation of -5.0% mom fall. Eurozone Sentix Investor confidence dropped sharply to -9.8 in September versus expectation of 1.4. German trade surplus widened to EUR 22.2b in July. Swiss unemployment rate was unchanged at 3.2% in August while CPI rose back to 0.1% yoy. China trade surplus widened to USD 49.8b in August. Japan Q2 GDP was revised down to -1.8% qoq while GDP deflator was unchanged at 2.0% yoy. New Zealand manufacturing activity dropped -1.9% in Q2.

Looking ahead, while investors might want to take breather following the busy calendar last week, US dataflow might worth attention as we are counting down to the September 17 FOMC meeting. Meanwhile, with polls showing the jump in support to Scottish independence, the pound would be closely watched. Indeed, the pound has plunged to the lowest level since November 2013 against the US dollar while weakened against the euro despite ECB president Draghi’s announcement of QE last week. The RBNZ meeting due Thursday would be a non-event while BOJ minutes would unlikely catch much attention. In China, inflation data would be due on Thursday. More in The Week Ahead – Sterling To Remain Pressured Ahead Of Scottish Referendum.

Daily Pivots: (S1) 1.6293; (P) 1.6316; (R1) 1.6353; More

GBP/USD reaches as low as 1.6102 so far today and stays weak. Intraday bias remains on the downside as the current fall from 1.7190 should now extend to 50% retracement of 1.4813 to 1.7190 at 1.6002. Break will target 61.8% retracement at 1.5721. On the upside, above 1.6283 minor resistance will turn bias neutral and bring consolidations. But recovery should be limited by 1.6534/6643 resistance zone and bring fall resumption.

In the bigger picture, price actions from 1.3503 (2009 low) are treated as consolidations to long term down trend from 2.1161. The current development, with medium term top formed at 1.7190, argues that such consolidation is possibly completed, just below 50% retracement from 2.1161 to 1.3503 at 1.7332. The firm break of 55 weeks EMA affirmed this bearish case and GBP/USD is now heading back to 1.4813 key support level.

GBP/USD 4 Hours Chart

GBP/USD Daily Chart

GMT
Ccy
Events
Actual
Consensus
Previous
Revised
22:45
NZD
Manufacturing Activity Q2
-1.90%

0.60%
0.00%
23:50
JPY
Current Account (JPY) Jul
0.10T
0.18T
0.13T

23:50
JPY
GDP Q/Q Q2 F
-1.80%
-1.80%
-1.70%

23:50
JPY
GDP Deflator Y/Y Q2 F
2.00%
2.00%
2.00%

02:00
CNY
Trade Balance Aug
$49.80B
$40.00B
$47.30B

05:00
JPY
Eco Watchers Survey: Current Aug
47.4
52.4
51.3

05:45
CHF
Unemployment Rate Aug
3.20%
3.20%
3.20%

06:00
EUR
German Trade Balance (EUR) Jul
22.2B
17.3B
16.2B
16.4B
07:15
CHF
CPI M/M Aug
0.00%
-0.10%
-0.40%

07:15
CHF
CPI Y/Y Aug
0.10%
0.00%
0.00%

08:30
EUR
Eurozone Sentix Investor Confidence Sep
-9.8
1.4
2.7

12:30
CAD
Building Permits M/M Jul
11.80%
-5.00%
13.50%
16.40%

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