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Cable eases slightly after overnight gains, what’s next?

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Cable sits lower on the day amid a firmer dollar


  • Merkel: Can also find a backstop solution by October 31
  • Payne from FT: Merkel was being polite
  • Were Merkel’s comments misinterpreted?

Whether or not Merkel’s remarks overnight were misinterpreted, markets reacted rather strongly with buyers overwhelming sellers to push the pound to near one-month high against the greenback.
The upside move ran into resistance at the 50.0 retracement level @ 1.2267 before falling back slightly in the subsequent hours. The key move was that buyers managed to clear resistance beyond 1.2175 and offers around 1.2200.
That triggered stops and I reckon it goes to show how quick short covering can happen in markets on just about any positive headlines for the pound. That will be the key risk in shorting the currency over the next few weeks as well.
As for cable now, I don’t see Merkel’s comments overnight as being anything game-changing. It could be hinting at a slight willingness to get somewhere on the backstop but it is hard to believe that there is some form of solution that hasn’t been already thought of.
The contrasting tones of Johnson and Macron yesterday continues to highlight the divergence in thinking between both parties in my view.
Nonetheless, cable does hold higher but I’ll be more comfortable staying short the pair from levels close to the 50.0 retracement level as we look towards Jackson Hole. Fed rhetoric will be key in the days ahead so just be wary that there is also weekend risk to follow in the dollar amid the possibility that Fed speakers may temper with market expectations.
The risk for buyers now is if price starts to fall back below 1.2200 towards the key hourly moving averages again. Any upside extension requires a break back above 1.2267 but if yesterday’s positive headlines can’t get the momentum going, I doubt that there is much else to keep the upside stringing along unless we hear anything new.

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