What will drive the Sterling through mid-year? See our forecastto find out!

Talking Points:

  • Sterling Runs Higher With 2% Intraday Range On Post-Brexit Vote Announcement
  • Late-Monday USD-Bounce on Mnuchin Fades Early Tuesday
  • Reflation Trade Continues To Deflate

Do you hear the institutional sellers running? There has been an exodus of sorts as institutions are unwinding their a few key trades set at the beginning of the year like Deutsche Bank’s bearish sterling Trade, which they’ve held on to for nearly two years. The sterling rose aggressively on Tuesday above the 200-DMA for the first time since June before the EU referendum shocked markets with a vote leave.

The announcement from PM May on the UK Snap Election to ensure as much as possible a united front regarding EU negotiations has taken the spotlight (at least for today) away from Sunday’s first round of French Elections. The break in attention has also given the EUR a lift as it trades well against the USD, JPY, & CAD. In addition to the European Currency outperformance, we see continued softness in commodity FX, which is leading to a drop in yields.

Yesterday, we honed in on the fall in 10-Yr yields, and today’s bid in Treasuries took the yield to 50% of the November-December range, which continues to show pressure on the reflation theme.

The chart shows GBP/USD breaking above the 200-DMA, but a chart worth also watching is the GBP/AUD. Overnight, the Australian Dollar declined after the RBA focused on a weaker labor market and the positive correlation of slumping Iron Ore also appears to be dragging on the Aussie. The Cable chart below has a vertical line overlaid for the first time RSI(5) broke into overbought territory, which can signal a Bullish a breakout. Given the trifecta of Bullish technical factors (price > Ichimoku Cloud & 200-DMA, Recent RSI(5) Bullish Breakout), we’ll keep an eye for a move to 1.3094, which is the 38.2% retracement of the 2016 range in Cable.

Interested In Seeing How retail traders’ Are Exposed In Key Markets?Find out here!

Closing Bell’s Top Chart: April 18, 2017: GBP/USD Trades Above 200-DMA First Time Since June

Sterling Runs Higher As PM May Shocks Markets With Post-Brexit Vote

Chart created by Tyler Yell, CMT

Tomorrow’s Main Event:

Wednesday US afternoon will bring New Zealand CPI data (Thursday morning in Wellington, New Zealand), which will take place in the US afternoon trade and leads the impact front for a currency. Other worthwhile news events is the Fed Beige Book. As of this writing, there have been few sparks from the Aso-Pence Bilateral Trade discussion that we mentioned yesterday could shift focus toward BoJ monetary policy and add additional support to the JPY.

IG Trader Sentiment Highlight:Crude Oil Sentiment:

Sterling Runs Higher As PM May Shocks Markets With Post-Brexit Vote

Oil - US Crude: Retail trader data shows 39.8% of traders are net-long with the ratio of traders short to long at 1.51 to 1. In fact, traders have remained net-short since Apr 10 when Oil - US Crude traded near 5266.2; theprice has moved 1.0% higher since then. The number of traders net-long is 7.3% lower than yesterday and 20.3% lower from last week, while the number of traders net-short is 4.6% lower than yesterday and 1.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests Oil - US Crude prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger Oil - US Crude-bullish contrarian trading bias. (Emphasis Mine)

--- Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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