Sterling rebounded from earlier losses, with Cable returning to the 1.3000 area after pegging a low just after the open of the London interbank market at 1.2940. GBPJPY has been a notable gainer, rising from sub-141.00 levels to over 142.00, aided along by broader underperformance in the Japanese currency. There doesn’t appear to have been a specific catalyst for the rebound. UK January construction PMI improved to a headline reading of 48.4 from 44.4 in December, signalling a reduced pace of contraction in the sector. As with findings in preliminary PMI data, the survey shows that the clearing of political uncertainty has translated into an increased willingness to spend on the part of clients. However, the release post-dated most of the gains in the Pound. The best in six weeks levels for Pound buyers, in the case against the Dollar, was itself an enticement. The 1.2975-1.3000 level remains an important support and buy zone for Sterling bulls, with 1.2900 and the 200-day moving average at 1.2825 the next key support zones.
In the medium term Sterling is in a neutral-to-bearish range, with Cable struggling to break 1.3100-50. Longer term, the Election heights of 1.3300 and 1.3500 remain resistance areas. UK Prime Minister Johnson made it clear yesterday in a keynote speech that his government is not looking for close regulatory alignment with the EU, which is likely to keep the UK currency’s upside in check. His embrace of an “Australian-style deal” as a possibility, a cosy way of selling the possibility of a no-deal Brexit at the end of 2020, given that there are very limited sectors that encompass an Australia-EU “deal”, suggests that he has shifted the goalposts, having formerly pledged, during the recent election campaign, that there was “zero chance” for a no deal Brexit at the end of 2020. The EU’s chief Brexit negotiator, Barnier, said that the EU was not looking for regulatory “alignment” from the UK, but warned that the EU “would be very demanding” with regard to the “quality and credibility” of the “level playing field mechanism.” This is a shot across the UK’s bows, signalling that there will be consequences if the UK attempts to go the low-regulation, low tax route (a la Singapore). The market view is that a no-deal Brexit, and the shift to trading on WTO terms that would entail, would be economically damaging to the UK, and the post election honeymoon for UK sentiment and economic data could be short-lived.
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Head Market Analyst
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