UK in the spotlight as Article 50 set to be triggered

Weekly FX Wrap: UK in the spotlight as Article 50 set to be triggered. Is this priced in to GBP? We’ll find out. The USD may start to find some support as key levels (against its major counterparts) near. Japanese year end on the Friday.

Looking to next week, few can look past the impending triggering of Article 50 – on Wednesday – which is widely expected to produce a knee jerk hit on the Pound. Given the slow grind higher through the week, some would assume that much of this is priced in, with GBP arguably at (near term) fair value levels. The healthier mood in the Pound has been partially ‘aided’ by the BoE tone, where the majority of the MPC are warming to a rate hike closer in on the horizon. Higher than expected inflation reported this week was followed up by stronger retail sales, which went against the anecdotal evidence suggesting pressures on household income, but this will likely pass through further down the line. Cable remain inside 1.2000-1.2800 for now, so the focus could switch to EUR/GBP again.

The cross rate has been bolstered by the backdrop of improving data out of the EU as a whole, and this was underpinned by the PMI’s in Germany and France on Friday morning, leading to the composite index for both manufacturing and services beating expectations. The shift in ECB policy to a more neutral stance has also given the single currency a boost with some members advocating a rate move ahead of tapering. EUR/USD is now challenging the sell zone through 1.0800, but this will prove tough going ahead of the French elections, along with the clear rate differentials, which cannot be ignored as the market looks to ‘price in’ what is effectively ‘normalisation’ much further ahead.

We look for 1.0900-1.0950 as the next major area of resistance in EUR/USD, and this will in part be down to what many see as an overreaction to the FOMC’s ‘dovish hike’. There was a clear case to suggest that USD gains had been overrun in response to the dot plot almost 3 months ago, but the retracement may be close to running its course, with USD/JPY value buyers likely to step in from circa 110.00 levels. Given next Friday is Japanese year end, we have to factor in some overshoot, but through this level, we can only see a major turnaround in global stocks taking us back to levels south of 107.00-108.00. Equities have stabilised (somewhat predictably) in recent sessions, but we may get some pre weekend volatility after the healthcare vote late Friday.

Focusing on US economic performance, Thursday’s Q4 GDP is the final reading, so core PCE could be of greater influence on US Treasury yields. Little else of note apart from a range of Fed speakers through the week. Plenty more in Japan to contend with, alongside repatriation flow, looking to the latest CPI data, industrial production and unemployment.

In Europe, we have a number of sentiment indices, headlined by Germany’s IFO survey on Monday, with the preliminary EU wide inflation releases towards the end of the week.

The commodity currencies will be trading largely on the back of the USD as well as Oil and base metals, though Friday sees the Jan GDP release for Canada. Friday’s CPI release was largely in line with expectations, giving credence to the cautious tone from the BoC. It is worth noting that gov Poloz is due to speak next week, but we are also watching the price action in Oil prices, where WTI is struggling to reclaim USD50.00.

Very little on the data schedule for either Australia or NZ, but we have domestic credit data in the former, which will shed some fresh light on worrisome residential leverage. ANZ business confidence also due. Moody’s cited economic resilience in NZ, and with the RBNZ sounding a less urgent tone on exchange rates, we expect NZD to find a modicum of support near term.