What’s Really Going on With the Cable?

Key Points:

• German Chancellor Suggests “Soft Brexit” unlikely.

• Cable continuing to decline below 1.2200 handle.

• Watch for further Brexit rhetoric in the days ahead.

The Cable just experienced a tumultuous week as the pair was beset by a relatively large sentiment swing towards the greenback late last week. However, there really doesn’t appear to be any reasonable support in sight for the embattled currency pair as renewed concerns over a “Hard Brexit” continues to mount. Subsequently, we take a brief look at last week’s events, as well as the risk that the current Brexit deadlock poses to the pair.

Last week was a volatile one for the Cable as the pair swung relatively sharply in response to both positive and negative factors. Initially, the pair rose above the 1.2300 handle as the UK Manufacturing and Services PMI results came in above forecasts at 56.1, and 56.2, respectively. However, the pair was subject to a negative sentiment swing late in the week which saw capital flowing back towards the Greenback and sold the pair back down to close at 1.2282.

Looking ahead, it’s likely to be relatively busy for the embattled pair as the UK Manufacturing Production and NIESR GDP Estimates fall due. In particular, the UK GDP estimates are likely to be relatively critical given that there is still plenty of focus upon the impact of a potential Brexit on current output and confidence figures. The market estimates put the result around the 0.5% q/q but some variability is to be expected. Also, there is plenty of US economic indicators due for release in the week ahead with the majority of the focus to fall upon the US Unemployment Claims and PPI figures.

From a technical perspective, the pair’s outlook remain neutral in the week ahead given that the pair still remains within a consolidation pattern from the 1.2200 handle. In addition, the RSI Oscillator is still largely trendless, within neutral territory, on the daily time frame. Subsequently, the pair would need to convincingly breach resistance around 1.2425 to commence a bullish trend. In contrast, a break below 1.2200 will signal the recommencement of the recent declines.

In addition, the ongoing rhetoric and machinations over the Brexit negotiations has also taken its toll upon the Cable. In particular, it appears increasingly likely that there will be no trade deal between the UK and the EU. Concern was renewed over the weekend as a war of words erupted between Theresa May and Germany’s Angela Merkel. Ultimately, this resulted in the German Chancellor stating that there would be no cherry picking of deal terms and that the EU is ready to take a hard line.

Subsequently, it would appear that the chances of an appropriate trade deal are slowly slipping away for the United Kingdom and this is potentially a relatively large risk moving forward for Cable. Ultimately, the next few weeks is likely to see plenty more volatility for the Cable as the window for a Brexit deal continues to close which will only see further selling ahead.