GBP/USD, GBP/JPY, Sonia: Levels, Ranges, Targets

 

UK’s Sonia and other interest rates are undergoing massive massive 3 year reforms to complete April 2018. Consistent with past commentary is market action is seen not in FX but in interest rate markets and the UK is no different but the BOE is most aggressive.

From Sonia’s 10 billion per month volume is now seen 17 billion daily volume with projections to 40 billion. The idea is a true Sonia futures market will develop in order for banks to forecast and draw forward curves. This is a first in BOE history and it was the Libor scandal to force central banks to re work internal interest rate markets. Sonia’s 17 billion matches against GBP/USD daily 500 million factored as 100,000ish contracts USD. Niot bad GBP but in relation to 17 billion, its quite paltry.
In interest rate markets, traders can do anything they wish to exchange rates.

Against interest rate reforms particularly when banks are adjusting to new changes, I don’t see the BOE raise the Bank Rate. Consider many banks are resisting the new changes. To raise means banks must re work current interest rate lines. Consider further, the only change adopted by the BOE since 1963 was introduction of Sonia in 1997. Never has the BOE revamped wholesale changes to interest rates in their long long history. Explains why the 3 year mission and not 2 as did the ECB but it also explains why slow and steady is correct to get it accurate.

What interest rate reform means to exchange rates is more of the same dull daily moves as the payoff goes to banks and interest rate traders at the expense of exchange rates.

Excuse extraneous as my deeper work into interest and exchange rates now attracts multitudes of banks, hedge funds and academics. This post will see 2000 views within max 2 days. To leave interest rate markets unattended is to restrict easily 2000 daily views. And all I ever posted was Sonia and 1 Eonia article. Wait until OCR, Fed Funds and other markets post.
Markets are literally starving for information oh and the correct information. The aspect to buy this, sell that, here’s a picture and Warren Buffet is made is finally leaving us in favor of true and correct information against logical calculations and a correct thesis behind the methodology.

For the past 2 days, zero interest to trade in UK interest rate markets existed especially yesterday as GBP/USD ranged a measly 51 pips from 1.3267 to 1.3310. In interest rate markets, traders can do anything they wish to exchange rates and the BOE system is no different.

GBP/USD’s big line breaks below are located at 2 rising lines at 1.3132 and 1.3131. Neither hit the overbought stage. Today’s target is 1.3321 and this falls just prior to the next big break at 1.3359. Below 1.3284, Targets 1.3269, 1.3243 and 1.3226.
Lines at 1.3132 and 1.3131 won’t break today as 1.3195 will stop any drops. A break in days ahead then the window is open to upper 1.2900’s.

GBP/JPY remains GBP/USD’s best friend as Correlations at 88% form a solid partnership. GBP/USD and GBP/JPY then remain double trades.

At current 151.71, the only other break is located at 152.04. GBP/JPY ranges were set quite wide today as the break below is located at 151.20. GBP/JPY sits on solid supports at 147.74 and 146.16. GBP/JPY supports is what holds GBP/USD from further drops and its the driver to GBP/USD.

I wouldn’t push my luck on GBP/JPY longs however as averages are hitting overbought. Current GBP/JPY at 151.70’s achieved today’s targets and we are looking for a drift back to near 151.20’s.

 

Brian Twomey