Sterling, USD Seek Support After Brexit Ruling, ’Strong Dollar’ Comments

2017-01-24 14:18:00 James Stanley

Talking Points:

- Last year saw the economic world upended by the political world as both the U.K. and the U.S. experienced significant political surprises. But we’re not out of the woods yet, as each economy is continuing to see price action driven from commentary and clues around politics in each economy.

- While many consider globalization to be entirely a ‘good thing’ one significant challenge presented from a truly global economy is the sharing of risks and prospects. After much of the world moved interest rates near-zero, it’s becoming increasingly difficult for the trend in rates to move-higher as a major economy looking to hike rates exposes their currency to additional capital flows, which could then become a hindrance to growth as exports get hit by an expensive currency.

- If you’re looking for trading ideas, check out our Trading Guides. And if you’re looking for ideas that are more short-term in nature, please check out our Speculative Sentiment Index Indicator (SSI).

To receive James Stanley’s analysis directly via email, please SIGN UP HERE

Sterling Drops After UK Supreme Court Rules PM May Must Seek Parliamentary Approval

In another twist in the saga around Brexit, the U.K. Supreme Court has ruled that Theresa May must receive Parliamentary approval before triggering Article 50 in order to begin negotiations to split from the European Union. This ruling can significantly complicate an already complicated process, and this ruling can, in essence, delay the process of triggering Article 50. The net-impact is an inclusion of additional uncertainty in a situation that was already pretty uncertain.

The timing of such a decision comes just a week after PM May had offered up initial ideas as to what the priorities of her strategy would be; and this had finally helped drive some life into the British Pound after a very long month of bearish price action that showed up after the Federal Reserve’s December rate hike.

The big question now is how much of an impact follow-thru price action may carry with such a driver. The British Pound had a rough summer after the Brexit referendum created periods where there was simply no demand for the currency; seeing major drops in June and again in October. Ahead of last week’s open, the British Pound gapped-lower before finally finding some element of support ahead of Theresa May’s Brexit speech prodded GBP-higher. But now that we have another bearish connotation for GBP and yet another series of question marks around Brexit, are bulls going to stay in as support or recede until more clarity is had?

Chart prepared by James Stanley

Political Drivers across the Dollar

Also on the morning of Theresa May’s Brexit speech last week, we had commentary from President Trump delivered in an interview in which he had spoken against the ‘Strong Dollar Policy.’ And while this helped to elicit some weakness in the Greenback, those comments were put-in-scope by the nominee for Treasury Secretary, Steven Mnuchin, when he said that President Trump’s comments were largely focused on short-term observations rather than ‘big picture strategy’.

But yesterday Mr. Mnuchin said that an ‘excessively strong dollar’ could have a negative impact on the U.S. economy. This is similar to a comment that Chair Janet Yellen had dropped in January of 2016 just after the first Fed rate hike in nine years, and this largely speaks to the other side of the ‘race to the bottom’ that saw global interest rates plummet to all-time-lows. With most Central Bank rates pinned very near if not below-zero, one major economy starting to ‘normalize’ rate policy exposes their currency to significant capital flows because there are simply so few economies paying interest rates or looking to guide rates higher. This will lead to a build-up of strength, very similar to what we saw in the Greenback in November and December of last year. But eventually – that strength will make American exports non-competitive in non-US markets, and this will, in-turn, hit the U.S. economy’s tenuous ‘recovery’. This is the other side of globalization. President Trump has taken a markedly different stance towards such matters and this is what has and will keep markets ‘on their toes’ for the foreseeable future.

This recent inclusion of additional political uncertainty in the Dollar has further contributed to the currency’s retracement of post-Election gains. After a near-historic move showed up from the lows of election-night, the U.S. Dollar has struggled to move-higher since the Fed’s rate hike in December. Current support is showing in a zone between the resistance swing-highs in USD from 2015, down to the level of the 50% retracement of that post-Election move. If price action breaks below this zone of support, the prospect of continuation in the U.S. Dollar, at least in the near-term, would look less-likely.