GBP/USD inter-markets: how deep is the dip?

Cable met increasing selling pressure at the beginning of the week, dropping to the 1.2850/40 band in response to comments by PM T.May over the weekend, stating that the controversial Article 50 could be triggered by end of March.

However, and on the other side, Chancellor P.Hammond argued that the country is entering the ‘Brexit’ process in an extremely solid economic condition. This view seems reinforced by recent auspicious indicators in the domestic economy, including today’s higher-than-expected Manufacturing PMI for the month of September.

Yields in the UK money markets are navigating a ‘sea of red’ for the time being, as opposed by the positive performance seen in their US peers, with spread differentials favouring the greenback so far. Fed Funds futures prices have retreated from daily highs and according to CME Group’s FedWatch tool, the probability of a Fed’s rate hike in December has climbed to near 56%.

The re-emergence of concerns over the potential consequences of the ‘Brexit’ vote for the UK economy promises to weigh on GBP in the near-to-medium term, although the curious optimism emanating from UK officials offers some contrast to those forecasting a kind of Armageddon-like scenario for the UK in the years to come.

Despite another – and likely deeper - leg lower is expected in GBP/USD, the quite solid UK fundamentals could offer some support and prompt bargain-hunters to step in. However, it is still premature to infer a lasting rebound in Cable, let alone a ‘buy the dip’ stance.

In the near term, the initial support emerges at levels just below the 1.2800 handle, recorded just a few days after the referendum. Occasional bullish attempts should find initial hurdle around recent tops in the 1.3120 area, reinforced by the 55-day sma. Once cleared, the retracement of the post-Brexit move at 1.3321 comes next, prior to recent highs above 1.3400 the figure.