FX Daily Strategy: Asia, Jul 22

Figure: 10yr Gilt v U.S. Treasuries and BOE-Fed Funds (%)

Apprehension will exist until the Autumn budget, despite a repeated commitment by PM Burnham to stick to the fiscal rules.  Spending commitments are clearer than tax raises measures, while new Chancellor Healey may not be strong enough to curtail spending pressures.  This could mean a persistent risk premium in 10yr Gilts v Treasuries until the budget.  Proof that the UK is sticking to the fiscal rules can help control the 10yr spread versus U.S. Treasuries later in the year, while the BOE also widely expected to slow the pace of QT to £50bln at the September MPC meeting.     

The appointment of John Healey is mixed.  While being a credible cabinet minister and good communicator, he has championed higher defence spending and may not have the political strength to block fiscal slippage from other cabinet ministers. Work will begin in earnest now for the autumn budget, with some reports that the Burnham government would also like to review spending targets at the same time.  A honeymoon period does provide scope for the new government to differ compared to the Starmer administration, but this is restrained by UK politics and a more centre left administration under Burnham than under Starmer.  Some of this can be seen in comparison to the IMF and OECD UK reviews that have just been finished.  Both recommend reducing the overgenerous triple lock rule for state pension increases, but this is likely to be politically too difficult before an expected 2029 general election. 

On the chart, DXY is little changed as prices extend cautious trade within the tight 100.65/85 range. Intraday studies are under pressure and the daily Tension Indicator is bearish, highlighting room for a pullback towards support at the 100.35 weekly low of 15 July. But a tick higher in oversold daily stochastics and mixed weekly charts should limit any tests in fresh consolidation. A close beneath here, however, will open up the 100.20 Fibonacci retracement, with a further break beneath here extending late-June losses below 100.00. Meanwhile, resistance is at congestion around 101.00. A break above here should give way to consolidation beneath the 101.33 weekly high of 13 July.

On the chart, pressure remains firmly on the upside above the 162.00 level. While gains are still struggling to sustain probes above the 162.50 congestion bullish structure suggest potential for break of the 162.70/84 highs. Clearance will see room for extension to resistance at the 163.00/164.00 congestion and high of December 1986. Meanwhile, support starts at the 162.00 level. Below here will ease the upside pressure and see room for consolidation to the 161.28/00 area. Would take break here to open up room for pullback to retest the 160.48 low and 160.00 figure.