Talking Points:
- GBP/USD Remains Bid Ahead of BoE as EU Pledges to Advance Brexit Negotiations.
- USD/JPY Carves Bearish Sequence Ahead of FOMC Rate Decision.
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The British Pound extends the advance from earlier this week as European Union (EU) Chief Negotiator for Brexit Michael Barnier pledges to meet with U.K. officials within ‘hours or days’ to initiate a new round of talks.
The narrowing threat of a ‘hard Brexit’ may keep the British Pound bid ahead of the Bank of England’s (BoE) quarterly meeting, with the central bank widely anticipated to deliver a 25bp rate-hike on ‘Super Thursday.’ The fresh developments coming out of the BoE may boost the appeal of Sterling should Governor Mark Carney and Co. show a greater willingness to move away from the easing-cycle and implement higher borrowing-costs in 2018. As a result, GBP/USD may continue to retrace the decline from the 2017-high (1.3657) as the BoE starts to normalize monetary policy and lays out a more detailed exit strategy.
However, GBP/USD stands at risk of facing a more bearish fate if the Monetary Policy Committee (MPC) implements a dovish rate-hike and endorses a wait-and-see approach for 2018.
GBP/USD Daily Chart
- Keeping a close eye on the topside targets as GBP/USD carves a bullish sequence following the failed attempt to test the monthly-low (1.3027), with both price and the Relative Strength Index (RSI) breaking out of the downward trends carried over from the previous month.
- First hurdle comes in around 1.3300 (100% expansion) to 1.3320 (38.2% retracement), with the next region of interest sitting around 1.3370 (78.6% expansion) followed by the Fibonacci overlap around 1.3450 (23.6% retracement) to 1.3460 (50% retracement).
USD/JPY initiates a fresh series of lower highs & lows even as the Bank of Japan (BoJ) sticks to its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control, and the pair may continue to give back the advance from the September-low (107.32) should the Federal Reserve highlight a more shallow path for the benchmark interest rate.
Similar to the BoJ, the Federal Open Market Committee (FOMC) interest rate decision may ultimately yield a limited response as the central bank is widely anticipated to keep the benchmark interest rate at the current threshold of 1.00% to 1.25%. Keep in mind, Fed Fund Futures are pricing a greater than 90% probability for a December rate-hike, and the central bank may merely use this opportunity to buy more time especially as Chair Janet Yellen’s tenure is set to expire in February.
With that said, market participants are likely to hunt for clues on how the benchmark interest rate will evolve in 2018, but more of the same from the FOMC may produce near-term headwinds for the greenback as central bank official start to trim the longer-run forecast for the Fed Funds rate.
USD/JPY Daily Chart
- Downside targets are coming back on the radar for USD/JPY following the string of failed attempts to test the July-high (114.50), with the broader outlook still capped by the Fibonacci overlap around 113.80 (23.6% expansion) to 114.30 (23.6% retracement).
- The Relative Strength Index (RSI) appears to be highlighting a similar dynamic as it flattens ahead of overbought territory and preserves the bearish formation carried over from May.
- May see a move towards 112.30 (61.8% retracement) to 112.80 (38.2% expansion) as USD/JPY carves a fresh series of lower highs & lows, with the next downside target coming in around 111.10 (61.8% expansion) to 111.30 (50% retracement).
Retail Sentiment
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- Retail trader data shows 56.0% of traders are net-long GBP/USD with the ratio of traders long to short at 1.28 to 1. The number of traders net-long is 8.2% lower than yesterday and 4.5% higher from last week, while the number of traders net-short is 15.3% higher than yesterday and 10.7% lower from last week.
- Retail trader data shows 49.7% of traders are net-long USD/JPY with the ratio of traders short to long at 1.01 to 1. The number of traders net-long is 7.3% higher than yesterday and 5.2% lower from last week, while the number of traders net-short is 4.3% higher than yesterday and 6.0% higher from last week.
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--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.
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