Market Absorbed Brexit Shock But Don’t Get Fooled By The Upward Correction
Markets stabilized for a second consecutive trading day with the euro rising above 1.11 and the pound touching a high at 1.3534 after the 1.3280-level has proved to be a short-term support. Market participants have got over the Brexit shock from last Friday since a worst-case scenario for the EU and a contagion effect seem relatively unlikely. The focus is therefore gradually shifting back to monetary policy. Economists predict that the Bank of England will cut interest rates before the end of the year, while they see only little chances of a rate increase by the Federal Reserve this year. This fact could limit dollar gains in the short-term, whereas the pound sterling remains under pressure. The price direction will mainly hinge on risk appetite for each currency, although any new hawkish hints from Fed policymakers would provide a boost to the U.S. dollar.
Bank of England Governor Carney is scheduled to speak at 15:00 UTC today and any dovish comments could drive the pound lower. The U.K. GDP is due for release at 8:30 UTC but given the recent uncertainty this report is not expected to have a significant impact on the pound.
We see the pound formatting a short-term upward channel after its sharp selloff. Once it breaks below that channel, falling back below 1.3370, we expect a higher likelihood of renewed downswings towards 1.3290, 1.3220 and 1.31.
However, above 1.3480 the pound could head towards the upper bound of the trend channel, which is currently around the 1.36-level.
The euro tested the 1.1130-resistance level, from where it first reversed. As stated in previous analysis we only expect further upward momentum after a significant break above 1.1135/40. However, if the euro breaks below 1.1080, we may see a decline towards 1.1035, 1.0990 and 1.0890.
From the Eurozone we have the German Unemployment report due for release at 7:55 UTC, followed by Eurozone Consumer Prices due at 9:00 UTC. If these reports are in line with expectations the impact on the euro will be limited.
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