GBP/USD, Brexit, Fed, Washington risks: a good case for a correction to at least 1.2300?

The focus in markets is now on the downside in the dollar after last week's correction when the improved nonfarm payrolls all around in the detail failed to support further demand for the greenback. Whether it was a typical sell the fact trade or if indeed there is something more to the move is yet to be unveiled. 

Market wrap: nonfarm payrolls and dollar sold-off - Westpac

However, the fact that wages are struggling to find momentum on a monthly aggregated basis, (albeit Feb m/m +0.1% vs previous was a positive), and that the unemployment rate had not improved by much this time around, -0.1%, there could be concerns that not all is as rosy as the Fed speakers have been claiming in the past several weeks of 2017 so far. Perhaps the main concern was that average hourly earnings which were expected to rise .3% only rose .2%. That is not good enough in the face of rising inflation and rates. Prices are rising 2-3 times as fast as that; Remember that January CPI was up 0.6% and triple the rate that wages are up. This is also in the face of the US government's debt ceiling limitations that will come to the fore this week. This should not be underestimated because it could possibly be the main catalyst of the year for a correction in the US stock market and the US dollar. Meanwhile, if such a trend in the job market does not improve significantly, it would not bode well for the outlook of the US economy this year as more and more of the US population return to the labour market yet unable to find work. This will only be pressuring wages further as the cost of living continues to rise.

As explained by the analysts at Brown Brothers Harriman, A correction in the dollar has begun - BBH, the technical picture of the dollar is turning bearish. Should the momentum advance this week, while sterling was one of the least to benefit from the move post data, this may be supportive of a more significant correction in GBP/USD albeit in the face of the UK's PM May who could be triggering Article 50 as soon as this Tuesday. 

Article 50 to be triggered this week?

While PM May had initially said that Article 50 would be triggered by the end of this month, weekend news in the WSJ states that the UK's Brexit Minister Davis has called on lawmakers to drop amendments to the Brexit bill, meaning Article 50 could be triggered as early as this week. What this means is that Brexit negotiations would commence and that means the pound could come under pressure due to the uncertainties of subsequent outcomes for the UK economy, especially if a trade deal cannot be reached with the EU. However, several of the papers this weekend have noted the mounting pressures on the prime minister to prepare for the "real prospect" that Brexit negotiations could fail, as reported by The BBC.

Fed and US debt ceiling risks this week

Meanwhile, we have the Federal Reserve announcing its interest rate decision this week on the same day that Washington will be thrown into the mix over the US's debt ceiling. This is something that markets are likely to be very cautious around over the next few months. If the democrats make like tough for Trump over raising the ceiling and should additional fiscal stimulus plans be jeopardised, markets may start to fall out of love with the US stock market, the US economy and the dollar.

The yield differential between the UK and US could continue to come under pressure as a result - (US 10yr treasury yields fell from 2.62% to 2.57% on Friday post nonfarm payrolls). We might find sterling playing catch up should markets focus on the immediate risks rather than trying to second guess the Brexit scenario first. After all, we have two years of Brexit negotiations ahead of us and plenty of political risks elsewhere first, such as the Dutch and French elections, possibly pressuring EUR/GBP lower considering the ground it has already covered this month.

GBP/USD levels

Valeria Bednarik, chief analysts at FXStreet explained that technically, the pair seems to have decelerated its decline, as in the daily chart, the pair has entered a consolidative stage, with the price still far below a bearish 20 SMA.  She further added that technical indicators turning modestly higher into negative territory. However, "In the 4 hours chart, the price keeps struggling around a bearish 20 SMA, whilst technical indicators are unable to enter the positive territory, with the RSI indicator turning south around 43, maintaining the risk towards the downside."

GBP/USD ke7 resistance at 1.2300

Analysts at Brown Brothers Harriman noted that sterling has risen in two of the past 11 sessions, and they were both on Fridays.  "Even before Friday's recovery, sterling's downside momentum was fading near $1.2140. The upside is not inspiring."  The analysts explained that GBP/USD has spent the last two sessions unable to move above $1.22 and noted that that has been done previously in this cycle. "The RSI and MACDs show no compelling reason to pick a bottom, while the Slow Stochastics appears to be bottoming at over-extended levels. A close above the five-day, which has not happened since February 23 might be a preliminary sign that a correction has begun. It is finished last week a little above $1.2185. Even then, the $1.23 area may provide a formidable ceiling."