Expect an Active US Dollar on Friday; Sterling may Rise Further on Prospects of a ‘Soft Brexit’
Eric Furstenberg • 3 min read
The US dollar gave back some of its recent gains on Thursday. All of the major currencies traded higher against the Greenback, with the GBP/USD posting a daily range of close to 200 pips. The pound traded aggressively higher early on Thursday, fueled by speculation that the UK could possibly access the European Union’s single market after the Brexit, albeit at a cost. Although the pound gave back much of these gains, it managed to end off the day with a gain of about 70 pips against the US dollar. Here is a daily chart of the GBP/USD:
GBP/USD Daily Chart
If the UK manages to stay in the single market, the pound would likely strengthen a good deal. The massive depreciation of the pound started long before the Brexit vote was confirmed in June this year. Market players tend to front-run events like these, and much of the pound’s ‘Brexit decline’ happened many months before the actual Brexit vote. If the Brexit becomes much less of a threat to the UK economy, there could be a powerful relief rally in the GBP/USD and other pound pairs.
Trading the GBP/USD and other pound pairs could possibly be very challenging in the near future. The pound is very sensitive to Brexit related news headlines, as we clearly saw on Thursday.
The long-term technical outlook for the GBP/USD remains bearish. Look at this weekly chart:
GBP/USD Weekly Chart
As you can see, the current market price is still below the 20-week moving average. Over the last couple of months, the pair has formed lower swing highs and lower swing lows which are characteristics of a healthy downtrend.
The short-term outlook for the pair is bullish, though. Buyers have carried the exchange rate higher and higher since the pound’s flash crash on the 7th of October earlier this year. Look at this 4-hour chart:
GBP/USD 4-Hour Chart
Whether this recent bid of the GBP/USD is merely part of a bear flag on the weekly timeframe, is disputable. Perhaps the pair will trade lower soon, perhaps it will keep trading higher over the near-term, who knows? One thing is certain, however, the market momentum is currently favoring the buyers. If UK officials manage to steer the UK to a ‘soft Brexit’, it would favor a stronger pound. This seems to be quite likely.
This pair traded aggressively lower today. The massive bounce in the oil price which followed the OPEC production cut deal on Wednesday has strengthened the Canadian dollar tremendously. A couple of days ago, the bearish / negative divergence on this pair became evident as momentum indicators started moving lower while the exchange rate kept moving higher. Here is a daily chart:
USD/CAD Daily Chart
I am a bit skeptical of the great bounce in the oil price. OPEC are known to be cheaters when it comes to adhering to production limits. Besides this, the oil producing countries who are not part of this production cut deal, are doing their best to take their cut of the pie (by producing more oil) which has just become more accessible to them. The higher oil price makes it much more profitable to pump oil, and easier for new oil producers to get a foot in the door of the oil market. I doubt the sustainability of the current oil price, and if we maybe get a selloff in the next week or two, the USD/CAD could trade higher once again. At the moment, the bullish momentum of this pair has been hurt, and it might take a lot to restore this bias to the market. Let us not forget about the US Nonfarm payrolls numbers (and other US labor market data) and the Canadian employment numbers which are released simultaneously on Friday at 13:30 GMT. The US ADP Nonfarm employment change number which was released on Wednesday came in much better than the forecasted number (216000 vs 165000). This ADP number is often a good indication of how the more important NFP numbers might fare. This gives us a hint that the NFP numbers could perhaps beat market expectations. If this were the case, and if the Canadian labor market data doesn’t come in too strong, the USD/CAD could bounce aggressively and erase the recent Canadian dollar gains against the US dollar.
Other important news events on Friday
Australian retail sales number – 00:30 GMT
UK Construction PMI – 09:30 GMT
Have a profitable day!