Pound Plunged as Theresa May Indicated Brexit Date; RBA On Hold; USD/CAD Profit Locked

The British pound plunged yesterday as the U.K. prime minister signaled the start of Brexit negotiations (Article 50) by the end of March 2017, which means that the U.K. will leave the EU by mid-2019. RBA left interest rates on hold leaving the Australian dollar indifferent. Greenback has been traded mixed against the G10 currencies, awaiting the Non-Farm payrolls report at the end of the week while the euro has been broadly higher against its major peers.

Greenback Mixed As Traders Expect Friday’s NFP

The U.S. dollar has been traded mixed against the G10 currencies, waiting Non-Farm payrolls report at the end of the week to determine its direction. The Markit manufacturing index came out slightly higher than the last figure at 51.5 versus 51.4 before, while the ISM manufacturing PMI surpassed market forecasts and jumped to 51.5 from 49.4 before. On the other hand, construction spending slowed down 0.7% in August against a drop of 0.3% the previous month, revised up from 0%.

Euro Broadly Higher; Manufacturing Sector Performed as Expected

The single currency was traded broadly higher against the G10 currencies on Monday and early Tuesday as indices from manufacturing sector met market expectations. Euro area’s Markit manufacturing PMI remained at 52.6 as it was widely expected, while Germany’s remained at 54.3 as the first estimation.

EUR/USD – Technical Outlook

The EUR/USD pair is trading within a symmetrical triangle since August over the short-term timeframe, as it failed several times to break the significant trend lines to the upside or to the downside. The common currency recorded a green monthly candle, however, the pattern kept the pair in a non-trending mode as it is waiting the non-farm payrolls report this Friday.

From the technical point of view, the most traded currency is moving between the 1.1155 strong support level and the 1.1250 resistance level whilst during last Friday’s session the price met again the rising trend line and failed to penetrate it to the downside. Furthermore, on the weekly chart the price now is developing slightly below the 100-SMA, as well as, it is moving below the three SMAs on the 4-hour chart.  Early this morning the pair fell below the 1.1200 psychological level and is moving towards the 1.1155 support level which is near with the rising line of the symmetrical triangle. A break below the latter obstacles will open the way for a retest of the 1.1120 – 1.1130 support zone. Technical indicators hold within the negative territory, while the MACD oscillator lies below its trigger line. The RSI indicator is following the bearish path and is approaching the 30 level.

Brexit by the end March 2017! Pound Plunged

The British pound hit hard yesterday by the statement from U.K. prime minister Theresa May for Brexit. The prime minister signalled the start of Brexit negotiations (Article 50) by the end of March 2017, which means that U.K. will leave the EU by mid-2019. On Monday and early Tuesday, the sterling plunged against all the major currencies, excepting against the Japanese yen where sterling was marginally unchanged. In U.K., the manufacturing sector expanded more than expected in September according to the Markit survey. The PMI index rose at 55.4 from 53.3 the previous estimate, while it was expected to slow down at 52.1.

GBP/USD – Technical Outlook

The GBP/USD pair created the fifth negative month in a row and is still falling since the decision of the U.K. to leave the European Union. The pair plunged more than 11% over the last five months and during yesterday’s session penetrated the upward sloping channel where the price was establishing over the last three months.

From the technical structure, the cable is now moving below the ascending trend line at 1.2840 price level and over the previous days the price opened with a gap to the downside. The pair met the second support level of the pivot point and had a rebound on the latter level. The next initial target is the all-time low at the 1.2800 psychological level where the price challenged it on July 6. In addition, the price is moving below the three SMAs (50-SMA, 100-SMA, and 200-SMA) on the 4-hour chart, however, the 50-SMA seems to be a good resistance level for the bears. Technical indicators hold within negative territory while the RSI indicator is approaching the oversold area as it is moving near the 30 level. The MACD oscillator is falling and is moving below both, its zero and trigger lines with strong momentum.

RBA Kept Monetary Policy on Hold!

The Reserve Bank of Australia kept its current interest rate on hold and affected very little the AUD/USD pair. The RBA has already had two rate cuts this year, in May and August, at a record low of 1.5%, to boost the country’s inflation and confront as painlessly as possible the decline of the mining sector. The central bank is satisfied with the current monetary policy, according to the just released rate statement, however, they kept the door open for further easing. Dr Lower is the new RBA Governor now, although, he maintained the belief that “forward-looking indicators point to continued expansion in employment in near-term.”

Since the last quarter of 2014, inflation stacked below the central bank’s 2% - 3% inflation target range and the easing policy barely helped the growth of consuming prices from a further slowdown. An additional reason for the RBA’s easing policy is the depreciation of its domestic currency in order to boost export of Australian goods and services. Australian economic growth is strong enough, at 3.3% according to the last available data, however, the RBA ex-Governor Glenn Stevens was trying to keep many parameters intact to retain a sustainable growth (like trading and the mining sector), and then drive the market to the central bank’s inflation target range.

The Australian dollar, relative to the three big currencies (USD, EUR, and GBP), have continued to recover. After a long secular decline over previous years, the Australian dollar managed to recover some ground and over the last four months it recorded more than 7% versus the U.S. dollar, the euro, and the pound showing some positive signs that it could sustain those gains. Despite the low environment of volatility – we haven’t seen the AUD record more than 4% of gains in a month versus the euro and U.S. dollar – we expect the next few months to be more volatile as the Federal Reserve is expected to increase its rates at its last meeting while the Reserve Bank of Australia (RBA) is expected to lower its cash rate in the near term.

AUD/USD - Technical Analysis

The AUD/USD pair remains without trend direction and above the 0.7500 level, but with a modest positive tone according to the daily chart, as the price holds above its moving averages (50-SMA, 100-SMA, and 200-SMA), which anyway remain flat and all together in a tight range between the 0.7400 – 0.7760 zone. Still, the pair lacks directional momentum and the significant resistance zone at 0.7735 – 0.7760 keeps capping the upside, while a year-high stands at 0.7830 - the level to surpass to confirm a bullish trend direction.

Therefore, the 0.7735 – 0.7760 zone and the 0.7830 level will be key to watch for over the next few sessions. On the other hand, below 0.7580 (a minor level), the pair can test the 0.7400 – 0.7440 price zone, although it seems unlikely that the U.S. dollar will find enough demand if the Reserve Bank of Australia decides to leave its cash rate unchanged for the second time in a row.

USD/CAD – Technical Outlook

The USD/CAD pair over the last 6 months is in the process to regain some ground following the aggressive sell-off from the 1.4700 resistance level until the 1.2460 on the long-term timeframe. Also, the price is establishing within a rising channel the last five months and made several failed attempts to break this pattern.

The commodity pair recorded the second weekly consecutive red candle and fell more than 0.6% over the last two weeks following the strong rebound on the 1.3275 resistance level which is the highest level since March. Moreover, the pair met the 50-weekly SMA and failed to surpass above it and now is trading near the strong resistance level at 1.3130, which is slightly below the 50-SMA on the 4-hour chart. Technical indicators hold within a negative territory, although with no clear directional strength. The MACD oscillator is moving above its trigger line, however, lies below the zero line. The RSI indicator is approaching the 50 level with some weak momentum. On our Monday’s analysis (JFD’s weekly strategic report), we recommended an entry level at 1.3110 price level and a first target at 1.3080 where the price hit yesterday (see our analysis here:http://bit.ly/2dFYdfw). The next level to watch is the 1.3245 resistance level if there is a penetration of the 1.3130 barrier. An alternative scenario is if the price slip below the 1.3080 support level then the pair will meet the 1.3030 obstacle.

What to watch today

In the morning, U.K. PMI construction for September will be announced and is forecasted to be a bit lower that last months’ figure, to 49.0 from 49.2 before. Eurozone’s PPI for August is expected to remain unchanged at 0.1% mom. In U.S., the IBD/TIPP economic optimism for October is coming out. Overnight, Australia will release its retail sales for August and the expectation is to rise by 0.2% mom from 0.0% the previous month.