Sterling Sinks Further on No-Confidence Vote Talk, Dollar Up

Summary: Sterling drove lower hit by reports that lawmakers had the numbers to trigger a no-confidence vote on PM May’s leadership. The Pound opened at 1.2480, fresh 20-month lows. Tensions between China and the US eased as officials between Beijing and Washington discussed plans to avert a trade war. The Dollar Index (USD/DXY) ended up 0.26% to 97.45.

US Bond yields rose as November Producer Prices beat forecasts. The yield on the US 10-year note rose to 2.88% from 2.85% while the 2-year yield was up 5 basis points.
Wall Street stocks closed in the red after rallying for most of the session. The DOW slipped 0.47%.

  • GBP/USD slip-sliding away, traders continued to hammer the Pound lower to 1.2480 in early Asia before settling at 1.2487 currently. While there was no official announcement, reports from different sources indicated that the numbers for a threshold to trigger a no-confidence vote on PM May’s leadership were reached. Sterling’s sentiment remains fragile with more volatility ahead
  • EUR/USD – finished at the lower end of its recent range at 1.1318 (1.1327 yesterday) ahead of tomorrow’s ECB policy rate meeting, the last for 2018. The ECB is expected to end its asset purchasing program and present its economic assessment of the Eurozone. Expect the range between 1.1300-1.1430 top remain intact in the current environment.
  • AUD/USD – outperformed, rallying 0.20% to 07207 from 0.7189 on higher resource prices. The Aussie was also buoyed by reports that trade negotiations between China and the US were progressing to ease tensions. Although no details were given on the discussions.
  • US Ten-Year Bond Yield – bounced off 2.85% to finish at 2.88%. Other global bond yields were mostly flat.

On the Lookout – Expect Asia to continue monitoring news headlines with further volatility in all markets. Today’s economic data releases will focus on Japan’s Core Machinery Orders and Producer Price Index (November), Euro Zone Industrial Production and US Headline and Core CPI.
US Headline Inflation is expected to have slipped in November to 0.0% from October’s 0.3% while Core inflation is forecast flat. A lower number will see a lower Dollar.
The speculative market’s position is long of US Dollar bets. The CFTC Commitment of Traders report (week ended Dec 4) saw net long Dollar bets to their highest level since December 2016. Net speculative Dollar long bets increased in 6 out of 9 IMM currencies (EUR, JPY, GBP, CAD, NZD, and MXN). Net speculative USD longs were trimmed against the AUD to -AUD 50,800 contracts from -AUD 53,900.

Trading Perspective

  1. USD/DXY – Unless we see a surprise in the US inflation numbers tonight, the Dollar Index should stay within it’s recent 96.30-97.60 range. This has been the range since November 20. The unknown is Sterling, which is vulnerable to further sell-offs. The Pound carries an 11.9% weight in the Dollar Index. Likely range today 96.75-97.55.
  2. GBP/USD – this currency pair opens on a soft note in Asia, unable to rebound off its lows. All the news out of the UK are focussed on Brexit which is overwhelmingly negative, for now. The next significant support level for Sterling is at 1.2370/1.2400. Short term support lies at 1.2460 and then 1.2420. Immediate resistance can now be found at 1.2535 and 1.2585. The latest CFTC report saw speculative GBP shorts increased to -GBP 39,800 contracts from -GBP 39,100. This is the largest number of GBP shorts since September 2017. The topside is just as risky and we can expect more volatile times ahead for the Pound.
  3. AUD/USD – The Aussie outperformed the Majors and finished up 0.2%. This currency pair continues to hold supports between 0.7160 and 0.7180. Immediate resistance lies at 0.7220 and 0.7250. A weaker US Dollar could see another strong Aussie attempt at the topside.
  4. USD/JPY – The Dollar rose against the Yen in tandem with the higher US ten-year yield. Risk sentiment also stabilised. USD/JPY traded to a high of 113.47 before settling at 113.378 in Asia. Total net speculative JPY shorts increased to -JPY 109,300 contracts from -JPY 104,300 according to the latest CFTC COT report. These are the largest net JPY shorts since February this year. Likely range today 112.75-113.55. Look to sell rallies.