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GBP : Bumpy Road

(Sun, 23 Aug 2020). GBP/USD FUNDAMENTAL HIGHLIGHTS:

  • A Bumpy Road Before an Eventual UK-UK Trade Agreement
  • Short-term Downside Risks for Euro Poses Concerns for GBP
  • Markets Await Chair Powell Jackson Hole Signal on Monetary Policy Review


A BUMPY ROAD BEFORE AN EVENTUAL UK-UK TRADE AGREEMENT

K-EU trade talks gives a sense of Déjà vuof the 2019 Brexit saga. Once again the UK and EU are heading for an Autumn showdown to reach a trade agreement. The EU Chief Negotiator, Barnier, stated that at this stage an agreement seems unlikely. However, in the world of politics, 2-months is a lifetime, as such, while the clock is indeed ticking, there is still plenty of time to break the impasse before the unofficial deadline at the end of October. Baseline case remains for an agreement to be reached.

 

SHORT-TERM DOWNSIDE RISKS FOR EURO POSES CONCERNS FOR GBP
Questions are being raised over the optimism tied to the Eurozone recovery, which has prompted a surge in the Euro and by extension this had seen the Pound piggyback the move against the greenback. However, with ECB minutes suggesting not to get married to the “EU”phoria narrative with August PMI’s also disappointing relative to the US. On a risk-reward front, further Euro gains may be harder to come by above 1.19 in the short term and similarly with the Pound above 1.32. Recent sessions in GBP/USD suggests a lack of conviction.

 

MARKETS AWAIT CHAIR POWELL JACKSON HOLE SIGNAL ON MONETARY POLICY REVIEW

A sparse economic calendar means that Chair Powell’s Jackson Hole speech (Aug-27th) will be the highlight of the week. The most recent FOMC minutes failed to enlighten participants on the monetary policy strategy review (Average Inflation Targeting). However, it did reveal that the majority of the board had not been convinced on YCC in the short-term and thus prompting a modest pullback in risk appetite and support for the greenback. That said, the minutes were from 3-weeks ago and with US yields firmer and curve steeper the environment has changed since then. With that in mind, market participants will be eying for signals to lay the foundation for action to be taken at the September meeting. Failure to do provide new information would risk a hawkish interpretation, prompting the US Dollar gain against its major counterparts.

 

 

 

 

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