Sterling traders adjust strategy after "no" victory

Forex News and Events:

The Scotland says “no” to independence, hence the 307-year-old United Kingdom remains unified. This is good news for the UK economy as heavy consequences of a Scottish exit have been avoided, at least in the immediate future. This said, the yes-no gap has been tighter with only 55% of voters supporting David Cameron’s “no” campaign. A non-negligible 45% wanted independence despite unanswered questions: independent Scotland’s economic viability, a potential new currency (as the BoE clearly positioned against an EZ-like monetary union), the custody of health services and other social spending, the partition of North Sea oil revenue. As the "no" victory has been narrow, the risk of another Scottish referendum should persevere in the next few years and reduce the upside potential of the Sterling in the longer run.

In the immediate future however, the UK and the EU take a breather as the Scottish presence in the UK clearly moderates the risks of a national resurgence walking into 2015 General Election. In the aftermath of the Scots referendum, the fears of a potential rise of Conservatives (Tories) decline meaningfully. Although a conservative win implies the holding in 2017 of a referendum on EU membership, traditionally more pro-European Scots should continue balancing the fallouts.

Sterling can finally re-focus on fundamentals

The Sterling rallied across the board as the political uncertainties dissipated early in the session this Friday. Now that the political risks have faded, the GBP-traders can re-focus on the fundamentals and on the BoE policy outlook. Especially, now that the speculations on Fed normalization gain traction.

GBP/USD recovered above Fibonacci 38.2% level on July-September drop (1.6487), yet failed to consolidate above the 21-dma as “no” trades seemingly prefer cash in profit pre-weekend. The 3-month (25-delta) risk reversals spiked significantly to the beginning of September levels. The technical indicators turned positive and given the sharp sell-off on Scottish fears over the past weeks, the Cable has more room to recover. The next target zone is placed at 1.6644/90 (September 1st high & 200-dma). Regarding the mid-long term, the hawkish Fed expectations will likely keep the topside limited. The 3-month cross currency basis continues favoring a higher USD vs. GBP, despite the positive political outcome from the Scotland.

Against the EUR and the JPY, the outlook is positive. The EUR/GBP tumbled down to a fresh two-year low of 0.78102, and has clearly more to weaken. The ECB expanded its balance sheet yesterday via the first TLTRO lending. Despite weak interest in long-term lending to non-financial companies, the ABS and covered bond purchases to begin in November as well as the second round of TLTRO due on December, should weigh on the euro toward the end of the year, thus should favor the sell-side in EUR/GBP markets. Versus the Yen, the impressive GBP rally pushed the pair above 180.00 for the first time since October 2008. As we suspect that the rapid sell-off in Yen requires a short-term pause at the current levels, the divergence between BoE/BoJ should keep the bias on the upside in the first half of 2015.

Today's Key Issues (time in GMT):

2014-09-19T12:30:00 CAD Jul Wholesale Trade Sales MoM, exp 0.80%, last 0.60%
2014-09-19T12:30:00 CAD Aug CPI NSA MoM, exp 0.00%, last -0.20%
2014-09-19T12:30:00 CAD Aug CPI YoY, exp 2.10%, last 2.10%
2014-09-19T12:30:00 CAD Aug CPI Core MoM, exp 0.20%, last -0.10%
2014-09-19T12:30:00 CAD Aug CPI Core YoY, exp 1.80%, last 1.70%
2014-09-19T12:30:00 CAD Aug CPI SA MoM, last -0.10%
2014-09-19T12:30:00 CAD Aug CPI Core SA MoM, last 0.10%
2014-09-19T12:30:00 CAD Aug Consumer Price Index, exp 125.7, last 125.7
2014-09-19T14:00:00 USD Aug Leading Index, exp 0.40%, last 0.90%

The Risk Today:

EURUSD remains capped by the short-term declining trendline and the hourly resistance at 1.2988 (05/09/2014 high). A break of these resistances is needed to suggest exhaustion in selling pressures. An hourly support now lies at 1.2835, while a key support stands at 1.2755. In the longer term, EUR/USD is in a succession of lower highs and lower lows since May 2014. The break of the key support at 1.3105 (06/09/2013 low) opens the way for a decline towards the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low). A key resistance lies at 1.3221 (28/08/2014 high).

GBPUSD has bounced further and has even breached the resistance at 1.6497. A key resistance lies at 1.6644 (see also the 200 day moving average). Hourly supports can be found at 1.6347 (intraday low) and 1.6247 (18/09/2014 low). In the longer term, the collapse in prices after having reached 4-year highs has created a strong resistance at 1.7192, which is unlikely to be broken in the coming months. Monitor the recent rebound as it could signal the start of a medium-term consolidation phase. A support lies at 1.6052, while a strong support stands at 1.5855 (12/11/2013 low). The first objective at 1.6495 of our long strategy has been reached. We have updated our stop-loss.

USDJPY continues its steep advance and is now close to the major resistance at 110.66. Given the overextended rise, the odds to see a short-term correction are increasing. Hourly supports can be found at 108.37 (intraday low) and 107.39 (12/09/2014 high). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. The recent new highs confirm a strong underlying bullish trend. Despite a likely pause near the major resistance at 110.66 (15/08/2008 high), an eventual break to the upside is favoured. Another resistance can be found at 114.66 (27/12/2007 high).

USDCHF declined sharply near the strong resistance at 0.9456 yesterday. A break of the hourly support area between 0.9301 (16/09/2014 low, see also the rising trendline) and 0.9287 would signal a corrective phase. From a longer term perspective, the technical structure calls for the end of the large corrective phase that started in July 2012. The break of the strong resistance at 0.9250 (07/11/2013 high) opens the way for a move towards the next strong resistance at 0.9456 (06/09/2013 high). Supports can be found at 0.9176 (03/09/2014 low) and 0.9104 (22/08/2014 low). A psychological resistance lies at 0.9500.

Resistance and Support: