Scottish independence dominated headlines again this week and has held GBPUSD near 8-month lows. The pair did make a couple of attempts to break lower than 1.6000, but was unable to clear the level. Cable seemingly finding support from a series of large UK businesses announcing that an independent Scotland could either face higher prices on the shelves and/or force a relocation of corporate headquarters to England.
To the upside there looks to be significant congestion starting near the 1.63 handle. Under normal circumstances it would be hard to envision GBPUSD clearing 1.6000 or much of the upside congestion in the near term, however with all of the event risk in the week ahead, there is a possibility.
Interestingly, despite the thrashing Sterling sentiment has taken over the last month or so, GBPEUR has stabilised near the annual high, sitting out most of the volatility. This looks to be a function of persistent soft Euro sentiment and suggests that whatever the Scotland result, resultant volatility seen in GBPEUR could be muted compared to that of GBPUSD or other Sterling pairs.
The common currency lacked conviction this week after all of the ECB policy excitement recently. EURUSD dropped into neutral, experiencing a period of much needed consolidation after declining about 5-cents in nearly a straight line over the last month. Weak sentient however has stymied any bounce and keeps the pair trending sideways near its lowest level in over a year. Despite the currently oversold nature of the pair the broader outlook for remains negative on muted economic growth expectations and monetary policy concerns.
An abundance of tradable economic events sets the Stage next week for a continuation of the elevated volatility that has characterised FX market activity over the last couple of weeks. There are a few highlights however that stand apart and are positioned to trigger the greatest degree of exchange rate fluctuation. Amongst them are British prices data, Bank of England (BoE) voting breakdown, the US Federal Reserve (Fed) monetary policy announcement, and the Scottish referendum.
On Tuesday the UK Consumer Price Index (CPI) result for August will be announced. The first half of 2014 has seen this measure of inflation decline to below the target +2.0% level. The consensus forecast for Tuesday is that prices grew at a rate of +1.6%, matching July’s result of the same, very near the worst result in 5-years. BOE Governor Mark Carney has been quick to point out that until such a time that he feels inflation is on course to return to target levels he is not likely going to increase interest rates. Disappointing inflation figures next week have a real possibility of adding to the woes of an already flagging British Pound.
The day after markets get the British prices data, BoE voting statistics from the latest monetary policy release will be announced. Last month markets were surprised when the traditional unanimity of the 9 member Monetary Policy Committee was broken. 2 dissenters called for an interest rate hike against the majority decision to leave rates unchanged. Expectations are that this month will repeat last month’s result. Should there be a 3rd dissenter Sterling would likely rally, which would be welcome relief for those who have been sidelined over the last couple of weeks.
The US Federal Reserve (Fed) is scheduled to announce its economic projections alongside its monetary policy announcement this Wednesday. Markets will be particularly sensitive to inflation expectations as they will offer clues to when Fed chair Janet Yellen might seek to hike interest rates. Given the importance of American interest rates on the global stage there is likely to be broad based FX market volatility surrounding the event. The Dollar Index which measures USD strength on a trade weighted basis is at its highest level in over a year and looking a little toppy. If markets are the least bit unhappy with Yellen next week, it could trigger a round of profit taking and see the Big Dollar give back.
The highlight for the week is undoubtedly Thursday’s Scottish independence referendum. With polls over the last couple of weeks highlighting a virtual dead heat, the resultant uncertainty has triggered significant rate volatility in FX markets. As mentioned above this has weighed heavily on the British Pound. In particular GBPUSD has given back around 5-cents since Scotland started to take over headlines. This theme is likely to continue heading into next week’s vote and should the outcome be for an independent Scotland, Sterling would be at risk of another round of declines.
More:Â Scotland Referendum: what the betting odds imply for GBP/USD
