Pound recovers ahead of busy next week

Yesterday morning the pound fell on headlines that Russia was going to retaliate and expel British diplomats. This came in response to the UK’s decision to oust Russian diplomats after Moscow refused to explain how a nerve agent was used on a former spy and his daughter in the UK. However, once UK’s allies also condemned Russia, the pound started to recover. In a joint statement, the leaders of France, Germany, US and the UK blamed Russia for the attempted murder of former double agent Sergei Skripal. Sterling will be in focus as investors’ attention turns back to the Brexit transition deal and UK fundamentals. Brexit Secretary David Davis will travel to Brussels this weekend and will meet EU’s chief negotiator Michel Barnier on Monday. The UK government is optimistic to secure a deal for a two-year grace period, which would bridge the gap between the UK leaving the EU and a new regime of trading rules and regulations getting figured out. However, it remains to be seen if they will be able to secure a deal and if so on what terms. A lot of differences between the UK and EU still remain, particularly over the Irish border issue. Meanwhile next week we will also have the latest UK CPI, wages and retail sales data to look forward to, and the Bank of England’s latest policy decision. The BoE is unlikely to have changed its outlook much from its previous meeting, so we won’t be expecting any fireworks from the rate statement. Still, next week’s economic data releases and Brexit negotiations should provide plenty of volatility for the pound.

GBP/CHF remains fundamentally and technically supported

If sterling were to climb higher next week then its best bet would be against a weaker currency like the Swiss franc. The franc weakened a little yesterday after the Swiss National Bank re-iterated its commitment in keeping monetary policy extremely loose and intervening in the FX market if necessary to weaken the currency. Thus, the GBP/CHF remains fundamentally supported, in our view. Meanwhile from a technical perspective, the outlook remains positive, too. This view was reinforced yesterday by the market’s refusal to hold below the prior day’s low, when it had formed what was a bearish-looking inverted-hammer candle. The breakdown only lasted for a brief moment before price rallied to hit a new high on the week. Thus the sellers were once again trapped. The path of least resistance is clearly to the upside, as things stand. If there is acceptance above the prior resistance level of 1.3240 now, then the next potential upside targets are at 1.3380 followed by the psychologically-important level at 1.3500, which comes in just above the previous high of 1.3490. However, if price fails to hold above 1.3250 and the next support at 1.3145 also gives way, then this would invalidate the bullish idea in the short-term outlook. In this case, a possible drop to the next support at 1.3070 would become highly likely.