Quid Report, Volume 72 1 August 2016 QUID REPORT · Quid Report, Volume 72 1 August 2016 ©...

Quid Report, Volume 72 1 August 2016

© Copyright 2015-2016 FM Capital Group LLC. All rights reserved. 1

QUID REPORT A comprehensive report on major GBP currency pairs Last week was another volatile week of choppy price action for sterling. There were wide swings in both directions throughout last week that contine to move currency pairs in 100-300-pip ranges. The continued highs in equities have given markets a renewed tolerance for risk that should benefit sterling. However, sterling weakness accelerated specifically against the euro in trading last week. This surge in sterling weakness versus the euro has given hints to the fact that the Great British pound will weaken in the medium-term. Sterling price action remains dominated by the monetary policy implications of the Brexit vote. More specifically, the market is speculating on the actions of the Bank of England (BoE) after last month’s huge disappointment (Volume 70).

The BoE surprised markets last month by not cutting interest rates and making absolutely no changes to monetary policy in the aftermath of the Brexit vote. At that time, the markets immediately looked ahead to August and have fully priced in a 25 basis points interest rate cut. The odds have also increased for a larger, 50 basis points cut in interest rates and more quantitative easing for the British economy. If the BoE does deliver on market expectations, it is the market reaction that traders and investors need to pay more attention to. Both the Japanese yen and the euro have rallied significantly in the wake of considerable monetary easing and negative interest rates. It is not unreasonable to assume that a cut in interest rates may produce the same result in the Great British pound. However, unlike in the Eurozone and Japan, the governments there have not seen the rise of the anti-establishment populism that voted the United Kingdom (UK) out of the European Union. So while we have speculated that an interest rate cut may ultimately rally the sterling, given the fundamental backdrop in the UK, it is likely that sterling may weaken in the face of dovish actions from the BoE.

The new trading week is quite busy out of the UK this week. The manufacturing PMI release kicks off a string of PMI numbers that will communicate the state of a post-Brexit, British economy. The PMI numbers released this week are not expected to show much weakness. Therefore, a weak number will be met with sterling weakness across the board. Conversely, a strong number is likely to rally sterling across the board too. Despite the slew of PMI data, the event risk of the week for the

“If the BoE does deliver on market expectations, it is the market reaction that traders and investors need to pay more attention to.”



pound sterling is the BoE monetary policy announcement. As already discussed the market’s reaction to this announcement will be important. It may just determine the direction of sterling price action for the rest of the year.

EUR/GBP

Resistance Friday Close Support

0.8750 0.8430

0.8626 0.8400

0.8600 0.8436 0.8350

0.8561 0.8310

0.8500 0.8250

Despite breaking to new highs at 0.8626, momentum was unable to match price with new highs on the RSI. The developing bearish divergence on the weekly chart has started to play out as the range



between the 0.8500 and 0.8600-levels broke to the downside. This correction has worked lower to 0.8248, where there is confluence at the 0.8250-support level and at the 38.2% Fibonacci level on the weekly chart. With momentum out of overbought territory, there may be a continuation of the bull trend. With price now making higher highs throughout last week, the EUR/GBP looks to move higher as signaled by the Fibonacci move on the weekly chart. With the correction lower holding above the 38.2% Fibonacci level, the EUR/GBP may invalidate the bearish divergence and continue the bull trend to new highs.

The European Central Bank (ECB) Governor Mario Draghi made it clear that the path for future monetary policy action is tilted toward further easing and accommodation. This dovish bias includes cutting interest rates again, as soon as September. But the markets have cheered monetary easing and continue to buy the euro this year. It is likely that September will be no different. The economic calendar is packed out of the Eurozone this week. The event risk of the week for the euro is the release of a slew of PMI data. With all eyes on the BoE and the RBA this week, however, it is doubtful that this data will move markets much. It will take a much larger than expected difference from the consensus, in either direction, to move the EUR/GBP on Eurozone data this week.

OUTLOOK FOR THE WEEK: Since last week’s break above the 0.8430-level, the EUR/GBP has found support at the 0.8400-level on dips. Bullish momentum is building on the four-hour chart as the EUR/GBP now makes higher highs. Price is actually moving in a rising channel. A move to the



downside that respects the Fibonacci levels over last week’s breakout will move the EUR/GBP higher to the top of the channel. A break of the channel to the upside confirms the bullish price action if it closes above the 0.8500-level. Buyers continue to set in on dips back toward the 0.8400-level with stops set below the 0.8350-level. Therefore, the best entries are below 0.8400. Bids ultimately target the 0.8850-level on a move above 0.8500.



GBP/USD


1.3680 1.3200

1.3500 1.3150

1.3400 1.3222 1.3119

1.3300 1.3080

1.3250 1.3050

The corrective rally that was being signaled in the GBP/USD two weeks ago may be over. Despite the Friday close above the 1.3000-level, the lower low in the RSI confirms the bearish bias in GBP/USD price action. The GBP/USD must break above the 1.3500-resistance level in order to flip sentiment to bullish. This resistance level signifies the multi-decade low set in January 2009 at the height of financial crisis. But the GBP/USD quickly bottomed then, the following month, to stage a monster rally that eventually moved it to the 1.7042 highs. There is potential for this to happen again. The recent 1.2791 low occurred in the aftermath of the Brexit vote. If the BoE continues to stall on monetary policy, the stage may be getting set for another monster rally above the 1.3500-



resistance level. However, another hold below the 1.3500-level, regardless of the BoE, will see the GBP/USD tumble back to the lows. Consequently, the GBP/USD opens the week with a bearish bias. The GBP/USD is becoming increasingly bearish ahead of the BoE.

The economic calendar is busy this week out of the United States. The event risk of the week for the U.S. dollar will be the release of the non-farm payrolls report. The Federal Reserve has remained cautiously hawkish since raising interest rates last year. At that time, the market priced in 2-4 rate hikes for 2016. However, the sharp drop in equities in February and the Brexit vote in June have all but taken interest rate increases off the table for the year. However, much like in 2015, the Federal Reserve will likely raise rates in December as not to lose credibility. It is highly unlikely that the Federal Reserve will increase interest rates in September as the market is currently pricing in. Even a strong jobs report is unlikely to move the Federal Reserve in September. But it will undoubtedly move the U.S. dollar higher, which is bearish for the GBP/USD.

OUTLOOK FOR THE WEEK: The move off the highs at the 1.3500-resistance level bottomed last week in the Fibonacci buy zone. The 61.8% Fibonacci level at 1.3053 remains in place as support as the new trading week opens. However, the failed highs signal a move lower to a lower low that finally breaks the 61.8% Fibonacci level at 1.3053. As such, the GBP/USD is biased to the downside in trading this week. If the GBP/USD can close the week again below the 1.3500-level, the corrective rally is likely over. The Friday close will likely depend on the outcomes of both the



BoE announcement and the non-farm payrolls report. Nevertheless, sellers line up between 1.3230-level and the 1.3250-level as the new trading week gets underway. Stops on bids are set wide above the 1.3300-level and last week’s highs. Offers first target the 1.3000-level. A confirmed close above the 1.3500-level, however, signals the beginning of a rally that has the potential to move as high as 1.4167, the 61.8% Fibonacci level on the weekly chart.



GBP/NZD


1.8627 1.8270

1.8538 1.8150

1.8450 1.8324 1.8076

1.8400 1.8000

1.8353 1.7950

The moves lower in the GBP/NZD were confirmed by the new lows in the RSI on the weekly chart. In fact, the GBP/NZD has closed below the previous 1.7707 low for the first time in decades. With the GBP/NZD now out of oversold territory, the corrective rally may be at an end. The Reserve Bank of New Zealand (RBNZ) has been unsuccessful at stemming the strength in the New Zealand dollar all year. Interest rate cuts and jawboning have not been enough to reverse the strong New Zealand dollar buying flows. At this point, it may take direct intervention from the RBNZ to stem the continued rise in the New Zealand dollar. With the resurgence of sterling weakness, the GBP/NZD



holds below the Fibonacci sell zone on the weekly chart. Price is, therefore, biased lower as the new trading week gets underway.

The economic calendar is light this week out of New Zealand. The event risk remaining this week for the New Zealand dollar is the release of the dairy price auctions. Prices in New Zealand are no longer rising strongly. With the New Zealand dollar so strong for much of the year, it has also worked to dampen price increases in its economy. Deflation becomes a problem when commodity prices are also weak yet the New Zealand economy remains robust. If deflation sets in the New Zealand economy, the RBNZ may become more aggressive in its efforts to slow the New Zealand dollar strength.

OUTLOOK FOR THE WEEK: Since rallying to the major 1.9000-psychological level, the GBP/NZD has developed a bearish divergence on the four-hour chart RSI. This move to the downside last week completed this divergence signal. Below the key 1.8858-level, the GBP/NZD opens the new trading week still biased to the downside. Sellers line up at the 1.8500-level. Stops are set above the 1.8624 highs. Offers first target the 1.8200-level, where there is confluence with the 61.8% Fibonacci level at 1.8217.



GBP/JPY


139.00 134.35

138.50 133.70

137.80 134.81 133.21

136.00 132.50

135.00 132.00

The GBP/JPY is in a downtrend. The break below the 147.02-level signals a Fibonacci reversal move that ultimately targets the lows at 116.82. Nevertheless, market participants do not expect the ultra-dovish Bank of Japan (BoJ) to tolerate the USD/JPY exchange rate below the 100.00-level. Using verbal manipulation, the USD/JPY has rallied significantly higher off the lows where it currently trades above the 102.00-level. The recent weakness in the Japanese yen had kept the GBP/JPY off the 128.60 lows. Now, however, with no move on monetary policy last week, markets have resumed buying Japanese yen. The rally into the Fibonacci sell zone at the 143.23 highs has



proven to be the top. As the Japanese yen strengthens and the USD/JPY moves closer to the 100-level, it will be interesting to see if equities can continue to move higher.

The economic calendar is busy out of Japan this week. The event risk of the week for the Japanese yen is the release of the BoJ monetary policy meeting minutes. Japanese Prime Minister Shinzo Abe had sent the Japanese yen reeling with his declaration for more monetary accommodation several weeks ago. But without the confirmation from the BoJ with more accommodative measures, the buying flows in the Japanese yen have resumed.

OUTLOOK FOR THE WEEK: The signal by the failed lows, pointed out in Volume 71, has been invalidated with the decline to new lows last week. The GBP/JPY has broken the short-term range between the 138.00 and 142.00-levels to the downside. The Friday close is also below the former range confirming the resumption of the bear trend. Therefore, sellers line up at the 135.50 and 136.00-levels with stops set above the 61.8% Fibonacci level at 135.59. Offers first target the 130.00-support level.



GBP/AUD


1.7750 1.7360

1.7650 1.7214

1.7600 1.7384 1.7136

1.7500 1.7100

1.7458 1.7000

The GBP/AUD remains biased lower for a continuation of the large Fibonacci move (see Volume 58). The Brexit pushed the GBP/AUD back below the channel again. The break below the 1.8000-level is also a significantly bearish development, as there is confluence at that level with the bottom trendline of the channel. Trading in oversold territory, however, signaled a bounce higher in the GBP/AUD. But the inability of the GBP/AUD to close last week above the 1.7500-level signals bearish price action. The Friday close would have confirmed the bullish candle of the week prior if it had closed above the 1.7500-level. Though the rally did not reach the Fibonacci levels, it did move



momentum out of oversold territory. The GBP/AUD now has the room to move lower on a continuation of the bear trend.

The economic calendar is busy out of Australia this week. The event risk of the week for the Australian dollar is the Reserve Bank of Australia (RBA) monetary policy announcement. Last week’s release of the consumer price index met market expectations with soft inflation. Because it was not the deflationary surprise it was the prior month, odds of the RBA cutting interest rates have been reduced. This has given the GBP/AUD a fundamental edge to move lower if the RBA follows through this week with no move on monetary policy. Even a cut in interest rates will weaken the Australian dollar only temporarily.

OUTLOOK FOR THE WEEK: The failed highs above 1.7500 erase the potential of the GBP/AUD moving higher to the bottom trendline of the channel. The 1.7500-resistance level has been key for direction in the short term. With the GBP/AUD closing and trading below the 1.7500-level, the GBP/AUD is now biased to the downside. Sellers now step in at and above the 1.7500-level with stops set above the 1.7600-level. However, due to expected volatility surrounding the RBA interest rate announcement, sellers should be patient. Once above the 1.8000-level, sellers may step in with stops set above the 1.8200-level. Offers first target the 1.7000-level yet ultimately target the 1.6750-level.



GBP/CAD


1.7660 1.7142

1.7530 1.7100

1.7450 1.7233 1.7040

1.7380 1.7000

1.7250 1.6962

The GBP/CAD continues to trade below the large 61.8% Fibonacci level at 1.7432 on the weekly chart (pictured in Volume 67). This break below the 61.8% Fibonacci level at 1.7432 signals a Fibonacci reversal move lower that targets the 1.5244 lows. Additionally, the developing bullish divergence at these new lows has been invalidated. Momentum has moved higher out of oversold territory. The Friday close above the major 1.7000-psychological level is another bullish signal for the GBP/CAD. This is largely due to weak oil prices dominating Canadian dollar flows once again. However, the inability of the GBP/CAD to close above the 1.7530-resistance level is hugely bearish.



With weak sterling flows expected to accelerate this week, sellers will meet any moves to the upside ahead of the BoE interest rate announcement.

The economic calendar out of Canada is very light this week. It is also a holiday-shortened week with Monday being a bank holiday in Canada. The event risk of the week for the Canadian dollar is the release of the Canadian jobs report. The Bank of Canada (BoC) is a cautiously optimistic central bank. With strong retail sales released last week alongside stronger than expected inflation, the GDP report unexpectedly showed a contracting Canadian economy. The market now understands why the BoC remains cautious in monetary policy. Therefore, a weak jobs report may confirm the weak GDP report and send the GBP/CAD higher on the back of a weak Canadian dollar.

OUTLOOK FOR THE WEEK: The rally in the GBP/CAD has moved price into the Fibonacci sell zone on the four-hour chart. However, the failed lows continue to signal a rally to new highs. Buyers can set up on these dips below the 1.7200-level with stops set tight below the 1.7100-support level. Bids first target the 1.7500-level.



ENDNOTES

“After this Week, Does August Matter?,” http://www.marctomarket.com/2016/07/after-this-week-does-august-matter.html.

Forex Factory, http://www.forexfactory.com/calendar.php.

“Inflation data: Interest rate cut in August 50-50 call despite weak consumer prices,” http://www.abc.net.au/news/2016-07-27/inflation-figures-june-quarter-cpi-abs/7664456.

Trading View, http://www.tradingview.com.

FX Risk Disclosure Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts. The information contained in this report does not constitute individually tailored investment advice. You, and only you, are responsible for the trades or investment decisions you make. Maximum effort and priority is place on using reliable information. Authors have obtained all market prices, data and other information from sources believed to be reliable although accuracy or completeness cannot be guaranteed. Such information is subject to change without notice. The information contained herein is of the date referenced and the Authors do not undertake an obligation to update such information or any other opinion expressed for that matter. Opinions, forecasts and strategies are subject to change without notice and the price of any security mentioned may increase or decrease. The Authors may have long and/or short positions on the securities discussed herein. The analysis contained in this report is based on a number of assumptions and changes in such assumptions could produce materially different results. This



communication is not intended to forecast or predict future events and past performance is not a guarantee or indication of future results. Please remember that investing in securities and other financial products comprises risk, which could result in the loss of the entire starting capital and beyond depending on the complexity and leverage of the chosen product. No liability whatsoever is accepted for any loss, whether direct, indirect or consequential, that may arise from any use of the information contained in or derived from this report, its contents and/or any service provided/advertised/offer through it. This information is intended for distribution only in those jurisdictions where such distribution is permitted. No refund is available for any service provided.

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