Pound Makes Fresh Highs

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Market Drivers January 25, 2017
Cable hits fresh highs as stops pop
IFO misses
Nikkei 1.20% Dax 1.43%
Oil $53/bbl
Gold $1201/oz.

Europe and Asia:
AUD CPI 0.4% vs. 0.5%
EUR IFO 109.8 vs. 111.3

North America:
USD House Price Index 10:00

Cable broke out to fresh highs in early London trade flirting with the 1.2600 figure as the rally in the pair continued for second day. The move was caused by a pop of stops in GBPJPY but the real power behind the move stems from the fact that investors are reevaluating the risks to the currency now that Brexit appears to be inevitable.

As we noted yesterday, “The situation within the EU is further complicated by the upcoming elections in Netherlands, France and possibly Italy. In all those countries the populist candidates are enjoying massive support and should the populist parties win, the Brexit vote would look prescient as it would confirm the EU is in danger of breaking up anyway. Under that scenario the UK approach to bilateral negotiations could prove to be superior that the current single market model, which explains why cable is trading near multi-week highs despite every indication that Brexit will become a reality.”

Elsewhere in Australia, the CPI data printed cooler than expected with trimmed mean CPI coming in at 0.4% versus 0.5% eyed as the year over year figure remained well below the 2% mark at 1.5%. Some analysts suggested that the lack of inflation offers RBA scope to cut rates further, but we doubt that Australian monetary authorities would change their stance from neutral given the steady growth in the AU economy. On the other hand, the central bank is unlikely to assume a more hawkish posture anytime soon, and that should put a cap on any AUDUSD rally for the time being. The pair slipped to a low of .7515 in late Asian trade but stabilized in European dealing and if it rallies back to the .7600 figure momentum could propel it to the triple top resistance at the .7700 level.

In Europe, the German IFO came in a bit softer than forecast printing at 109.8 versus 111.3.This was the lowest reading since September as companies expressed concerns about the future. Given the protectionist rhetoric of the Trump administration, it’s understandable that German business sentiment would sour, but IFO also showed that current conditions remained steady and EUR/USD shrugged off the news rebounding back towards 1.0750.

With very little data on the eco calendar, today FX markets could continue to chop for the rest of the day. Today’s President Trump is expected to make several announcements regarding security including the building of the wall with Mexico which depending on the size of the budget could be seen as stimulative by the market and could prop USDJPY back to 114.00 as the day proceeds.

Boris Schlossberg
Managing Director

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