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A Focus On The UK Markets

The month of September saw volatility resume after a dull August with the VIX whipsawing over 50% between 24.00 and 38.00. The seemingly never-ending tech rally grinded to a halt after the Nasdaq failed to make any progress above the 12,500 level. Currently prices are around 10% off the highs with the USD experiencing its largest surge in months. The DXY broke back above the 94.00 handle after an increase in Covid-19 cases and a resurgence in national restrictions and lockdowns spooked investors. The Japanese Yen also benefited from the sour risk mood as EUR/JPY broke below the 123.00 handle for the first time since July. This came after Abe’s Successor Yoshihide Suga took charge as the new prime minister for the nation reiterating his intention to maintain and advance the former PM’s approach titled “Abenomics”.

The FTSE100 continues to remain amongst the laggards within the indices space as it continues to trade below beneath pre pandemic levels. The index continued to trade tepidly around the 6,000 handle after the UK continue to hold talks with the EU over their future. Sterling volatility soared within the month after earlier discussions of an Internal Market Bill threatened to violate the withdrawal agreement which led to GBP/USD trading to lows around 1.2750. PM Johnson’s approach to the handling of the talks was thrown into question as he faced rebellion from members of his own party. Initial plans to violate the withdrawal agreement would have resulted in the UK jeopardising any hopes of a deal with not only the EU but also the US where reports from officials stated that no free trade agreement would be made with the nation should the agreement be broken. Going into this week, signs of optimism between the EU and UK pushed EUR/GBP below the 0.9100 after UK Chief Brexit negotiator Frost hinted at progress in trade discussions last Friday. It appears that the UK have signalled a commitment to reaching a free trade deal with the EU though Brussels are reportedly set to subdue any heightened optimism regarding an imminent deal after growing concerns that PM Johnson has not obtained support from key advisers and his party for compromises required as talks near the final stages.

With the sun about to set on the current furlough scheme in the UK, Chancellor Sunak offered the labour market a lifeline after putting together a plan to protect jobs. Titled the Job Support Scheme; the program will replace the furlough system and ensure that workers get 75% of their normal salaries for the next six months. The plan aims to prevent mass job cuts after the government introduced new restrictions and guidelines to tackle a rise in Covid-19 cases. The new scheme which is set to support ‘viable jobs’ only has come under question as a definition for ‘viable’ remains the bone of contention. The chancellor who has outlined that he ‘cannot save every business (or)…job’ looks to implement the scheme from the 1st November and is set to cost the government an estimated £300mln each month. The UK which recorded its largest monthly figure for borrowing last month faces growing budget concerns as debt increased to over 100% of the nation’s GDP. The ‘Winter economy plan’ is also set to offer VAT cuts and provide additional loans for struggling businesses.

Discussions regarding the current monetary policy for the UK continue to resurface after the BoE maintained the OBR at 0.1% whilst deciding to keep asset purchases steady at the current rate. The committee reiterated their plan to continue to monitor the economy closely and remain ready to deploy further tools and actions in order to meet the objectives. Tightening of monetary policy was refuted until evidence suggests that progress has been made in achieving the 2% inflation target, though more recently BoE’s Tenreyro outlined that evidence on recent negative rate testing has been encouraging. Going into Q4 financiers and investors will continue to keep a close eye on the pound; the outlook for the UK still remains uncertain and whilst the recovery since May has been sharp, the nation still has a few hurdles to overcome.

Technical overview

Tools used: 21/50EMA, 200SMA, Fibonacci.

GBP/USD

Cable is currently trading between its moving averages and most recently found resistance at the 21/50EMA whilst retreating from the 78.6% retracement level. A hold below this level could potentially signal a move lower for the asset to support levels around previous lows with extension levels at 1.25870 (127.2%) & 1.2475 (161.8%). A break back above the 1.3000 handle is likely to trigger a bullish move up to at least 1.3250 for the asset with 200SMA acting as nearby dynamic support.



EUR/GBP

EUR/GBP currently trades around the 0.9150 level with nearby resistance being at 0.9200. Price has most recently found support at 0.9075 whilst holding above the 50EMA and 61.8% level. A violation of the bearish trendline is likely to signal a run up to at least 0.9200 with 0.9300 being the next key area to watch out for. To the downside, a break and close below the prior low may reignite sterling strength and lead to a push lower to key levels of support with the first initial target level being around 0.8950.



This article is from our October 2020 edition of Trader's Insight. Check out the full magazine here

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