Quid Report, Volume 69 11 July 2016 QUID REPORT · OUTLOOK FOR THE WEEK: The economic calendar is busy out of the Eurozone this week with little event risk for the euro. Therefore,

Quid Report, Volume 69 11 July 2016

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QUID REPORT A comprehensive report on major GBP currency pairs Contrary to many media reports, the world remains standing after the Brexit referendum vote. In fact, the FTSE 100 has recovered all of its Brexit losses and the S&P 500 closed last week at new all-time highs. Sterling price action remains dominated by the implications of the Brexit vote. The political risks persist for sterling into the new trading week. The politicking in the British Parliament stands to undermine sterling even more than the actual vote has. By the same token, politicking in the British Parliament also stands to rally sterling when uncertainity become resolved and removed from the market. As a result, volatility in sterling continues to roil the forex markets.

While the uncertainty in the markets continues to fuel volatility, the strong bear trends in sterling have generally continued to new lows even into the Friday close last week. As a result of the Brexit vote, the Bank of England (BoE) is effectively dovish. There have even been whispers of the BoE introducing negative interest rates in response to a Brexit. Last week, BoE Governor Mark Carney reassured markets that the central bank stands ready to support markets and the economy. Interest rate cuts and more quantitative easing are effectively back on the table for the BoE to consider as early as this week.

The BoE is expected to maintain its dovish stance, which the market may perceive as very supportive of financial markets. A case in point is equity markets that have found solace in the BoE’s call for increased monetary accommodation. It is likely that the BoE cuts interest rates this week in response to the Brexit vote. But will the pound sterling really weaken further if that happens? Both the Japanese yen and the euro have rallied considerably in the wake of monetary easing and negative interest rates. It is not unreasonable to assume that a cut in interest rates would produce the same result in sterling allowing the Great British pound to put in a bottom and to begin to rally. It is expected that severe accommodation will be bearish for pound immediately but then rally the pound long-term. Less accommodation than expected will rally the pound in the short-term. It’s long term implications are a little more complicated. Carney & Co. will be expected to ease again in August, which is bearish long-term. They’ll likely deny it for the entire month ahead of the August meeting making for a volatile summer.

“It is not unreasonable to assume that a cut in interest rates would produce the same result in sterling.”



The new trading week is fairly busy but with little economic data released from the United Kingdom (UK) this week. Rather, there will be several public statements with the Inflation Report hearings early in the week and a speech delivered by BoE Governor Mark Carney much later in the week. But the event risk of the week for the pound sterling is the BoE monetary policy decision announcement. Despite extreme selling momentum in sterling, the market may not collapse further on dovish comments and sentiment this week out of the UK. The construction and services PMI number released last week did point to a souring British economy. And yet the Great British pound failed to move lower across the board upon their release. This speaks to some exhaustion in sterling markets, which is expected to begin exhausting further this week. The large bear trend in sterling has already moved the major GBP currency pairs to new multi-year lows across the board in the aftermath of the Brexit. In many of the major sterling currency pairs, the new lows have not been supported by fresh selling momentum. Therefore, signals of strength in pound sterling should be taken as the beginning of a relief rally. The strength of such a rally will depend on the currency pair.



EUR/GBP

Resistance Friday Close Support

0.8815 0.8500

0.8750 0.8430

0.8626 0.8526 0.8400

0.8600 0.8350

0.8561 0.8310

The break above the zone of resistance between the 0.7860 and 0.7940-levels back in March sparked a larger reversal higher to the 0.8500-resistance level. This Fibonacci reversal move was finally completed with the highs in trading last week to 0.8626. Price is now finding staunch support against the 0.8500-level. With the Brexit vote, the EUR/GBP has the fundamental edge to continue this rally back to the highs on the weekly chart at 0.8815. Despite breaking to new highs, momentum has been unable to match price with new highs on the RSI. The developing divergence on the weekly chart remains. However, this divergence is not a true bearish divergence with price



not making new highs on the weekly chart. Therefore, the EUR/GBP finds itself in a range now between the 0.8500 and 0.8600-levels. This range bound price action can work lower still to the Fibonacci buy zone. If momentum can move lower to less extreme levels, then that would bode well for a continuation of the bull trend. Unlike an outright correction lower, range bound price action takes more time for momentum to return to levels that can support a continuation of the bull trend higher.

OUTLOOK FOR THE WEEK: The economic calendar is busy out of the Eurozone this week with little event risk for the euro. Therefore, the euro will be at the whim of pound sterling flows this week. The bearish divergence on the four-hour chart has started to play out with momentum falling away from the extreme RSI levels. The lower highs in momentum help to further confirm the lower highs in price action and bias the EUR/GBP to the downside in the short-term. As such, the EUR/GBP may finally break below the 0.8500-level that held support all last week. Longs established in prior trading sessions have taken profits. Big buyers may no longer be buying the EUR/GBP above the 0.8500-level. Momentum is no longer diverging with the weakening price action. It supports it. Sellers, therefore, start to line up above the 0.8500-level with stops set above the 0.8626 high. Sellers should cover positions by Thursday, ahead of the BoE interest rate announcement. Offers target the 38.2% Fibonacci level at 0.8376 highlighted on the four-hour chart.



GBP/USD


1.3250 1.2900

1.3200 1.2860

1.3150 1.2938 1.2800

1.3119 1.2750

1.3000 1.2700

The GBP/USD moved to new lows in trading last week. It would seem that sellers remain in firm control. However, the bullish divergence on the weekly chart continues to call that control into question. The GBP/USD is expected to remain bearish long-term but a corrective rally is being signaled. As if on cue, the political risks have seemingly sparked the GBP/USD higher to begin the new trading week. A Friday close above the 1.3000-level, after the Friday close below it, will be a nascent bull signal. The market reaction to the BoE this week will likely set direction in the GBP/USD for the medium-term. While the charts point to a bullish reaction, momentum will betray price action if a decline lower continues to be matched by increasingly bullish momentum.



The economic calendar is packed busy with data releases out of the United States this week. The event risk of the week for the U.S. dollar will be the release of the U.S. consumer price index report. This inflation report will show whether or not last week’s jobs report was an aberration or the resumption of actual strength in the U.S. economy. A weak number will provide the fundamental impetus to rally the GBP/USD to the new highs that are being signaled by the aforementioned technical developments in the GBP/USD charts.

OUTLOOK FOR THE WEEK: Another bullish signal in the GBP/USD is the new high in momentum on the RSI of the four-hour chart. The failed lows in price after finding resistance at the 50% Fibonacci level in trading last week (see Volume 68) is another bullish signal. This Fibonacci move should have resulted in a move lower below the 1.2791 lows. Instead, the GBP/USD has found support at the 1.2900-support level to end trading last week. There is also a bullish divergence on the four-hour chart that is currently in play. This divergence has started to play out with momentum moving to new highs. Therefore, buyers set up below the 1.3000-level as the new trading week gets underway. The better entries are at and below the 1.2900-support level. Stops on bids this week are set wide below the 1.2791 lows. Bids target the 1.3250-level. A break above this level confirms the beginning of a rally that has the potential to move as high as 1.4167, the 61.8% Fibonacci level on the weekly chart.



GBP/NZD


1.7950 1.7650

1.7900 1.7600

1.7863 1.7702 1.7550

1.7825 1.7500

1.7760 1.7450

The GBP/NZD continued to move to new, all-time lows last week. This move lower is also confirmed by the new lows in the RSI on the weekly chart and completes the Fibonacci reversal move to the 1.7707 lows. In fact, the GBP/NZD has closed its first week below the previous 1.7707 low for the first time in decades. With the GBP/NZD trading in oversold territory at multi-decade lows, the new trading week may see a corrective rally after the massive one-week decline of last week. The Reserve Bank of New Zealand (RBNZ) has been unsuccessful at stemming the strength in the New Zealand dollar all year. Interest rate cuts and jawboning have not been enough to



reverse the strong New Zealand dollar buying flows. At this point, it may take direct intervention from the RBNZ to stem the continued rise in the New Zealand dollar.

OUTLOOK FOR THE WEEK: The economic calendar is practically empty this week out of New Zealand with no event risk for the New Zealand dollar. The bullish divergence on the four-hour chart at the new lows is already playing out as the new trading week gets underway. This divergence signals a bounce rally back to the Fibonacci levels over the decline of the past three weeks. It also signals a rally in the GBP/NZD that can move momentum out of oversold territory. Buyers line up on a move towards the lows below the 1.7900-resistance level with stops set below the 1.7750-level. Bids target the 1.8500-level where there is also confluence with the 38.2% Fibonacci level on the weekly chart.



GBP/JPY


133.21 129.65

132.50 128.65

132.00 130.01 127.50

131.40 127.00

130.50 126.00

Our long-time call for the GBP/JPY to move lower and break below the large 61.8% Fibonacci level at 147.02 has been fulfilled in the aftermath of the Brexit vote. This break lower confirms the bearish trend as the long-term trend in the GBP/JPY. The break below the 147.02-level signals a Fibonacci reversal move that ultimately targets the lows at 116.82. Additionally, market participants do not expect the ultra-dovish Bank of Japan (BoJ) to tolerate the USD/JPY exchange rate below the 100.00-level. The USD/JPY traded as low as 98.78 in trading last week. Since then, Japanese Prime Minister Shinzo Abe has sent the Japanese yen reeling with his declaration for more monetary accommodation. Using verbal manipulation successfully, rather than direct intervention in the



foreign exchange markets, has pushed the USD/JPY significantly higher from the lows where it currently trades around the 102.50-level. In like manner, the GBP/JPY has rallied off the lows of last week as the new trading week gets underway.

OUTLOOK FOR THE WEEK: The economic calendar is not at all busy out of Japan this week with no event risk for the Japanese yen. The bullish divergence on the four-hour chart was invalidated in trading last week when momentum made a new low on the RSI. The GBP/JPY, however, opened the new trading week bouncing off the 130.00-support level allowing momentum to move significantly out of oversold territory. The news out of Japan over the weekend has left the Japanese yen quite offered for the week. As such, the yen may likely weaken all week into the BoE interest rate decision announcement. Therefore, buyers will step in on dips to the 133.00-support level. Better entries are below the 132.00-level. Stops on bids are set below the 130.50-level. Bids target the 135.00-resistance level.



GBP/AUD


1.7458 1.7000

1.7360 1.6957

1.7214 1.7083 1.6935

1.7136 1.6873

1.7100 1.6760

The GBP/AUD has been biased lower for a continuation of the large Fibonacci move lower for over three months (see Volume 58). The Brexit outcome has helped the GBP/AUD break the channel to the downside once again. The break below the 1.8000-level is a significantly bearish development. In trading last week, the GBP/AUD moved to new lows at 1.7083 with momentum that invalidated the bullish divergence on the weekly chart. Nevertheless, momentum moved into oversold territory. Trading in oversold territory puts market participants on watch for a bounce higher. A corrective rally has the potential to move the GBP/AUD back to the key 1.8000-resistance level. There is



confluence at the 1.8000-level with the bottom trendline of the channel. Such a rally may also move momentum out of oversold territory. With momentum out of oversold territory, price can resume the downtrend back to the lows.

The economic calendar is busy out of Australia again this week. The event risk of the week for the Australian dollar is the release of the Australian jobs report. The RBA maintained its neutral sentiment making little comment on the Brexit vote and its own political uncertainties. While the dovish sentiment did jolt the Australian dollar last week, it was completely undone by the end of the week. Despite the resilience of the Australian dollar strength, the Australian labor market has remained robust. A weak jobs report, however, due to the political uncertainties in Australia and the global economy may send the Australian dollar lower in a more sustainable fashion.

OUTLOOK FOR THE WEEK: The bullish divergence on the four-hour chart continues to develop as the new trading week gets underway. This bullish divergence signals a rally in the GBP/AUD off the new lows of last week. Though a rally will move the GBP/AUD to the Fibonacci levels over the decline of the past two weeks, the GBP/AUD does have the potential to move higher still to the bottom trendline of the channel. Buyers below the 1.7200-support level have stops set below the 1.7083 lows. Bids ultimately target the 1.8000-level. The 1.7500-resistance level will be key for direction in the short term. Once above the 1.8000-level, sellers line up at the bottom



trendline of the channel around 1.8050. Stops on these bids are set above the 1.8200-level. Offers target the 1.6750-level.



GBP/CAD


1.7100 1.6840

1.7040 1.6809

1.7000 1.6869 1.6750

1.6962 1.6710

1.6900 1.6634

The GBP/CAD continued to move to new lows in trading last week. These new lows remain below the large 61.8% Fibonacci level at 1.7432 on the weekly chart. This break below the 61.8% Fibonacci level signals a Fibonacci reversal move that targets the 1.5244 lows. The developing bullish divergence at these new lows was invalidated in trading last week. Momentum moved to new lows on the weekly chart RSI. However, as momentum moves into oversold territory, a correction higher in price is a possibility in this new trading week.



The economic calendar out of Canada is clear for the week except for two events. Without question, the event risk of the week for the Canadian dollar is the BoC monetary policy decision announcement. The BoC is a cautiously optimistic central bank. While they are not expected to raise interest rates, it will be the first BoC statement post Brexit. Any comments made, however, are likely to be cursory at best. Rather, the market needs to be pay attention to any downgrades in economic activity by the BoC in light of the recent Alberta wildfires.

OUTLOOK FOR THE WEEK: As the GBP/CAD fell to new lows, momentum continued to diverge on the RSI of the four-hour chart. This divergence helped ignite the rally off the lows at 1.6692. This bullish divergence is playing out as the GBP/CAD rallies higher to the 1.7000-resistance level. Momentum has moved out of the oversold territory on this rally higher. A move higher into the Fibonacci sell zone will likely complete the momentum play to the upside. Sellers line up above the 38.2% Fibonacci level at 1.7036. Stops set above the 1.7250-resistance level, which also has confluence with the 61.8% Fibonacci level. Offers target the 1.6750-support level.



ENDNOTES

“Abe Set for Upper House Super Majority After Japan Election,” http://www.bloomberg.com/news/articles/2016-07-10/abe-set-to-win-majority-in-upper-house-election-nhk.

Forex Factory, http://www.forexfactory.com/calendar.php.

“For RBA’s Next Move on Interest Rates, Set the Alarm for July 27,” http://www.bloomberg.com/news/articles/2016-07-05/rba-stands-pat-to-weigh-inconclusive-election-brexit-aftermath.

“If No Article 50 Soon, What are the Fundamental Drivers?,” http://www.marctomarket.com/2016/07/if-no-article-50-soon-what-are.html.

“Markit/CIPS UK Construction PMI,” http://static4.uk.businessinsider.com/image/577a80114321f11a008b5cd5-1126/markit%20july%204%20skitch.png.

Trading View, http://www.tradingview.com.

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you have any doubts. The information contained in this report does not constitute individually tailored investment advice. You, and only you, are responsible for the trades or investment decisions you make. Maximum effort and priority is place on using reliable information. Authors have obtained all market prices, data and other information from sources believed to be reliable although accuracy or completeness cannot be guaranteed. Such information is subject to change without notice. The information contained herein is of the date referenced and the Authors do not undertake an obligation to update such information or any other opinion expressed for that matter. Opinions, forecasts and strategies are subject to change without notice and the price of any security mentioned may increase or decrease. The Authors may have long and/or short positions on the securities discussed herein. The analysis contained in this report is based on a number of assumptions and changes in such assumptions could produce materially different results. This communication is not intended to forecast or predict future events and past performance is not a guarantee or indication of future results. Please remember that investing in securities and other financial products comprises risk, which could result in the loss of the entire starting capital and beyond depending on the complexity and leverage of the chosen product. No liability whatsoever is accepted for any loss, whether direct, indirect or consequential, that may arise from any use of the information contained in or derived from this report, its contents and/or any service provided/advertised/offer through it. This information is intended for distribution only in those jurisdictions where such distribution is permitted. No refund is available for any service provided.

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Quid Report, Volume 69 11 July 2016 QUID REPORT · OUTLOOK FOR THE WEEK: The economic calendar is busy out of the Eurozone this week with little event risk for the euro. Therefore,