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GBP, USD & AUD Brace for Cross-Continental Geopolitical Risks

GBP, USD & AUD Brace for Cross-Continental Geopolitical Risks

Dimitri Zabelin, Analyst

British Pound, US Dollar, Brexit, Powell, Mnuchin, Hong Kong Tension – TALKING POINTS

  • British Pound could fall on Brexit talks ahead of June 30 deadline as UK reopens economy
  • US Dollar could rise if Powell and Mnuchin testimonies, FOMC minutes spark risk-off tilt
  • Australian Dollar may surrender if geopolitical tension in Hong Kong spoils market mood

Powell & Mnuchin Testify, FOMC Minutes Are Released: US Dollar in Focus

US Dollar traders will be closely watching the release of the FOMC meeting minutes from the rate decision earlier this month. An underlying somberness in the text could further dispel notions of a speedy recovery. If that in turn catalyzes a risk-off tilt in market mood, it could put a premium on haven-linked assets like the US Dollar and Treasuries and a discount on their growth-oriented peers like AUD, NZD, NOK and SEK.

Federal Reserve Chairman Jerome Powell will also be testifying with Treasury Secretary Steven Mnuchin in front of the House Financial Services Committee. Hints at another fiscal stimulus could help support risk appetite and alleviate the pain cycle-sensitive assets have been suffering through recently. Having said that, continuous spikes in Covid-19 cases could overwhelm optimism in the fiscal arena and push USD higher.

US Dollar Technical Analysis

After bottoming out at an 11-week low, the US Dollar index (DXY) has been steadily rising and cleared a plethora of resistance shelves. The Greenback index may aim to crack a familiar inflection level at 98.27, which if broken could open the door to retesting the late-May swing-high at 99.80. Breaking above that with follow-through could inspire additional buyers to enter the market and help push DXY higher.

DXY- Daily Chart

Chart showing DXY

DXY chart created using TradingView

Geopolitical Tension in Hong Kong: Australian Dollar, Japanese Yen in Focus

The Australian Dollar may be held hostage not only to macro-fundamental concerns of weaker growth prospects on account of rising Covid-19 cases but also to geopolitical tensions in Hong Kong. Concern about the Special Administrative Region’s autonomy has driven a wedge between the US and China and threatens to spill over into other areas of policy – like trade.

Policymakers in the National Peoples Congress are rumored to be meeting this week in Beijing for three days to discuss polishing up what could be a finalized national security bill for Hong Kong. Some of the provisions include banning activities that carry the scent of "separatism, subversion, terrorism and foreign interference”. These measures are reportedly scheduled to take immediate effect after the meeting is concluded.

The various aspects of the security bill would not only apply to local residents but foreigners as well – and this is where markets are growing worried. Hong Kong’s role as a key node in the global financial network has been underpinned by its independence. Concern about its autonomy could have significant implications for the region’s growth prospects if cross-border capital flows begin to thin.

Yiu-chung, Hong Kong's sole delegate on the NPC Standing Committee said firms should "seek professional legal advice" after the security laws are enacted. Chief Executive of Hong KongCarrie Lam will be giving a speech this week after the security laws have been enacted, and while lockdown measures are still in place, protests may erupt. The Japanese Yen may subsequently rise if political friction sours market mood.

Uncertainty about what the reaction will be by authorities and the potential international blowback from those actions could pressure the China-sensitive Australian Dollar. The Asian giant is Australia’s largest trading partner, and geopolitical reverberations that carry economic consequences in China ripple out and typically impact the cycle-sensitive AUD.

AUD/JPY Technical Analysis

After AUD/JPY was rejected at the swing-high at 79.120, it retreated and led to an almost-five percent decline in the exchange rate. Since stabilizing, the pair has entered into what appears to be a compression zone between support at 72.934 and descending resistance dating back to where AUD/JPY topped. A break in either direction here could reveal an underlying directional bias and subsequently inspire further moves in that direction.

AUD/JPY – Daily Chart

Chart showing AUD/JPY

AUD/JPY chart created using TradingView

Brexit Talks, Opening Up UK Economy: British Pound in Focus

From a fundamental perspective, the geopolitical circumstances surrounding the British Pound make it susceptible to periodic bouts of heightened volatility. This week, UK Prime Minister Boris Johnsons intends on fast-tracking legislation that would rollback lockdown measures on businesses as a way to revive economic vitality. Mr. Johnson will also be giving a crucial speech on the UK’s recovery after the virus is under control.

Furthermore, EU Brexit chief negotiator Michel Barnier will be meeting with his UK counterpart David Frost for talks on how to ratify a trade deal before December 31. June 30 also marks the last day the UK is able to ask for an extension of the transition period. After this expiration date, the government has to reach an agreement with Brussels by the end of the year or the UK risks crashing out of the European Union.

GBP/USD Technical Analysis

GBP/USD may retest a formidable support range between 1.2230 and 1.2106 after the pair was rejected at the lowest of three key resistance tiers at 1.2751, 1.2816, and 1.2877. If GBP/USD bounces from the multi-layered floor, it could condemn the pair to a period of directionless trading. Having said that, sooner or later, Cable will likely have to retest descending resistance, and capitulation there could reveal an underlying bearish bias.

GBP/USD – Daily Chart

Chart showing GBP/USD

GBP/USD chart created using TradingView

--- Written by Dimitri Zabelin, Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitriTwitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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