Brexit, Brexit, Brexit – Cable Slides to 11 Month Lows

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Market Drivers August 6, 2018
GBPUSD hits 1 month lows on Brexit fears
Dollar wobbles
Nikkei closed Dax -0.40%
Oil $68/bbl
Gold $1211/oz.
Bitcoin $6985

Europe and Asia:
No Data

North America:
No Data

A very quiet start to the week’s trade with Japan markets closed and no major data on the docket anywhere in the G-11 universe. The biggest story of the day was the continued slide in cable which hit fresh 11 month highs as it dipped below towards 1.2950 support on renewed fears of a hard Brexit.

Over the weekend UK Trade Minister Liam Fox noted to BBC that “the intransigence of the commission is pushing us towards no deal.” It took a while for his comments to take effect on the market but cable finally started to slide at the start of London open and took out the 11 month lows before finally stabilizing.

It’s very hard to get a sense of where the Brexit saga is going as it now becomes a matter of simply who blinks first. The Europeans are utterly unwilling to consider a border in Northern Ireland while PM May’s government is unwilling to consider the right of free movement within the UK. The political issues may well be more important than the economic details which can eventually by worked out.

If Brussels was playing true hardball, it would try to force a hard Brexit, which in turn may prompt the second referendum in UK as the populace considers the full implications of break from the trading block. But the the EC has scores of competing constituents as well and may also be looking for a compromise solution.

In either case, cable is trading on waves of uncertainty and will now become even more susceptible to any news headline as the deadline to Brexit draws nearer.

In the meantime, the weakness in cable is not permeating through the rest of the anti-dollar block. Although most of the majors are marginally weaker against the buck, the greenback hasn’t made much progress. Part of the reason could be simple summer doldrums as volumes will remain quiet with most of the key participants away for the month, but part of the reason may also be the lackluster July NFP data which failed to impress dollar bulls on Friday.

Although job creation chugged along, wage growth remained anemic with prior months data actually revised lower. Real wage growth has been essentially non-existent for the past three months – and this in the midst of the biggest GDP expansion in years. The fact the economic growth is unable to lift wages is an ominous sign for the US economy and the dollar as well. Right now the buck’s strength is coming mainly from capital inflows due to Fed’s persistent rate hikes and the slowdown in the rest of the G-3 universe, but perhaps the true strength of the dollar – USDJPY has failed to make any upward progress in post NFP trade and continues to wallow at 111.25 level. If US corps decides to push the pair below the 111.00 figure as the day proceeds that would be a true sign of markets discontent with US data.

Boris Schlossberg
Managing Director

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