23 September, 2016
After recovering ground following a return to levels not seen in over a month below 1.29, the bounce in the GBPUSD appears to have lost momentum at the conclusion of the week following headlines being made by UK Foreign Secretary Boris Johnson that the process of leaving the European Union does not need to take two years once Article 50 is invoked. The Foreign Secretary also made comments that Article 50 will be invoked early next year and while this has been widely reported elsewhere, the explicit comments have likely made investors reconsider options on the British Pound.
The present expectations are for the British Pound to be maintained at what are historically depressed levels for a prolonged period. Although economic data from the United Kingdom might not hit the extent of an immediate downturn that was feared, there is still an anxious road ahead once the UK Government actually make the turn towards beginning to exit the European Union.
Let’s put it this way. The outcome of the EU referendum could be compared to a sentence being declared, but the UK still has to begin the process of leaving the European Union and the possible ramifications that this could have on investor sentiment. Right now all that has been priced into the Pound is the EU referendum outcome, the unknown of what will really happen with the EU exit is still ahead and does present risks for investors that they will need to take into account.
Overall, Dollar weakness is still seen as the major catalyst and motivator behind recovery rallies in the British Pound. I still maintain my own view that the GBPUSD can still realistically conclude the year between the 1.20 – 1.25 levels if the expectations to invoke Article 50 early next year are realised. At best, the GBPUSD can head back towards the 1.34 zone if you are looking at the technical possibilities but we have seen time and time again throughout 2016 that the investor strategy towards the currency is to sell rallies rather than buy low.
Traders once again reject the BoJ
While the Federal Reserve interest rate decision is attracting the most headline attention, the major market action this week has been in the Japanese Yen where traders have once again rejected the efforts by the Bank of Japan (BoJ) to resume weakness in the Japanese Yen. Despite the BoJ making a significant change to its policy framework that some are seeing as a different direction of monetary easing from a central bank, investors rejected the efforts in spectacular fashion with this leading to the USDJPY returning to the major psychological level around 100.
The Yen has weakened since then with the USDJPY returning just above 101.230 in the early hours of trading on Friday, but the reason for this could be that the BoJ intervened in the markets following the USDJPY meeting a major support level. I also maintain the view that there is very little to BoJ can do to encourage a return to Yen weakness with this being in spite of any detrimental impacts that the fascinating Yen correction has had on an already-struggling Japanese economy.
What to look out for today
The spotlight is going to remain firmly on the US Federal Reserve with three officials from the central bank scheduled for speeches later today. Perhaps the markets will be monitoring to see if any of the expected speeches indicate any further divide of opinions on US interest rate policy within the Federal Reserve after three out of 10 voting members voted for a US interest rate rise this month.
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