Overall, there is scope for some further unwinding of expectations surrounding a ‘hard’ Brexit and also some further unwinding of short Sterling positions. This combination is likely to give Sterling a firm underlying bias, especially with the dollar vulnerable to a correction, although momentum will tend to fade on any approach to the 1.3000 area. Sterling gained strong support over the week with the highest level against the dollar for close to two months and just before the flash crash with a move above 1.2700. Sterling also strengthened to 12-week highs against the Euro.
The UK currency gained support after comments from Eurogroup head Dijsselbloem that the EU might be able to find a way for the UK to maintain single-market access following an EU exit. There were also comments from UK Brexit minister Davies that the UK could, in theory, continue to make payments into the EU to maintain single market access while the International Trade Minister Hands also hinted late on Friday that the UK could remain in the EU Customs Union.
The Liberal Democrat win in the Richmond by-election will also increase pressure on the government to adopt a softer tone and Sterling continued to gain support from short covering.
The Brexit process will continue to be watched very closely in the short term as the political manoeuvring continues. The remarks both on and off the record from key government ministers will continue to have an important impact on sentiment. The government is also due to submit its appeal to the Supreme Court following the High Court ruling in November that the government needed to seek parliamentary approval before triggering Article 50 to launch the formal EU exit negotiations. The government is looking to over-turn the ruling and submissions will be important, although the Court is not scheduled to make a ruling until early in 2017.
Sterling has gained support over the past two weeks from hopes that the government will not be forced into a ‘hard’ Brexit and will be able to negotiate some form of access to the single market. If these hopes are sustained, Sterling will tend to maintain a more positive tone while any evidence of a reversion to a more hard-line stance would tend to put the currency back under pressure.
As far as data releases are concerned, the PMI services-sector data will be released after mixed readings for the manufacturing and construction sectors. The latest industrial production data is scheduled for release on Wednesday along with the latest NIESR GDP estimate. On the retail side, the BRC retail sales data on Tuesday and shop-price data Wednesday will be watched closely with the inflation data particularly important given expectations that Sterling weakness will increase prices sharply over the next few months. The latest trade data is also due on Friday. The data impact is likely to be relatively neutral with the Bank of England firmly on hold in the short term.
Bank of England Governor Carney is due to deliver a speech on Monday, although it is unclear whether there will be a release of any text. Trends in the dollar will continue to be watched closely and will inevitably have a big impact on GBP/USD. The underlying tone is liable to be one of consolidation ahead of the FOMC meeting the following week, but there is the risk of some further net consolidation in the US currency after very strong US gains since the Presidential election.
There is unlikely to be any substantive Fed rhetoric with the December rate increase still a done deal following the latest employment report and the Fed will enter the pre-meeting quiet period from Tuesday. The US ISM non-manufacturing data will be released on Monday with the University of Michigan consumer confidence data on Friday.
The latest COT data recorded a small increase in net short non-commercial positions to just over 78,000 in the latest week from under 75,000 the previous week, the first increase for three weeks, and there will be a further threat of short covering which will tend to boost the UK currency.
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