BY Lukman Otunuga
Sterling bears went on a rampage during trading on Monday following the fresh political rifts within the Conservative Party, which eroded the outlook for a currency already dogged by concerns over the immeasurable impacts of a Brexit to the UK economy. The unexpected resignation of Brexit supporter and Pension Secretary Iain Duncan Smith on Friday may have heightened fears over Prime Ministers David Cameron’s ability to unify his party at such a critical period.
Financial heavyweights have wasted no time in voicing their concerns of a Brexit, with the CBI warning of serious shocks to the United Kingdom resulting in as much as 950,000 jobs lost by 2020. With internal political tensions set to intensify as the Brexit vote looms, the Sterling may be left vulnerable and open to further losses with the uncertainty haunting investor attraction towards the currency.
While the Brexit uncertainty continues to leave the pound depressed, domestic data from the UK which has followed a lackluster pattern may have sabotaged any true recovery in value. Market participants may direct their attention towards the UK inflation report today which may provide additional clarity on how the United Kingdom is faring amid the global turmoil. Inflation has edged noticeably higher since the start of the year, and if today follows the same positive pattern then Sterling bulls may be offered a temporary lifeline before the Brexit fears drag prices back down. Investors should keep in mind that these tepid inflation levels are still well below the Bank of England’s 2% target and coupled with the unstable global economic landscape, the central bank remains in no rush to raise UK rates anytime soon.
The GBPUSD experienced a sharp decline yesterday with prices attaining a daily close back below the psychological 1.44 level. This pair is on route to turning heavily bearish on the daily timeframe and a weak inflation report may act as a catalyst for a swift decline back towards 1.42. From a technical standpoint, prices are trading above the daily 20 SMA while the MACD is currently flat. Bears must secure dominance below 1.44 for a potential decline towards 1.42.
Euro searching for direction
The Euro is currently on standby ahead of the anticipated German Ifo Business Climate report which should provide some clarity on the health of the Eurozone economy. For an extended period ongoing concerns about slowing global growth and China woes have exposed the Eurozone to downside risks, while fears that the ECB may have run out of ammunition to boost growth remain elevated. If the German Ifo signals a decline in confidence today then the Euro may sink slightly as investors pile on bets of further stimulus measures to be implemented by the ECB.
The EURUSD is currently technically bullish on the daily timeframe as prices are above the daily 20 SMA while the MACD trades to the upside. Previous resistance at 1.120 should act as a dynamic support for an incline back towards 1.130 and potentially higher.
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