Sterling breached $1.41 to record another post-Brexit high as a renewed bout of dollar softness and some better-than-expected employment numbers fuelled bids.

After showing signs of a slowdown, there was a strong bounce back in December. Wage growth, rose by 2.4% compared to 2.3% in the quarter to October. Although below inflation at the present there are signs that tentatively rising wage growth will converge with falling inflation in the coming months. Sterling’s recovery will only aid that. Generally speaking we are also seeing less chance of the cliff-edge exit with the tone of Brexit negotiations more constructive since December following the UK’s agreement to financial terms.

But for all the chatter about Brexit and UK unemployment numbers, this is very much a soft dollar story. The dollar index has given up the 90 handle and we have the dollar below 110 against the yen for the first time since September and the euro has broken to a fresh three-year high.

The pound is now well bid above its 50-, 100- and 300-day moving averages and with today’s blast above $1.41 seems set to consolidate above $1.40. There is not a huge amount of resistance on the upside for cable. The 50% retracement of the move from $1.71 to $1.19 is at $1.4590. Then we have the $1.4770 May 3rd 2016 high before $1.5000 comes back into play. But these seem a long way off and depend entirely on dollar weakness to be sustained.

For that we will look to Davos and what president Trump says with regards to trade. It does seem that threats of trade wars – put on the back burner last year – have resurfaced. Tariffs on washing machines may only be the start, while there are ongoing worries about Nafta. Trade concerns are trumping the Trump tax policy. The focus on the dollar’s slide seems to be dampening the mood generally in equity markets.

Nevertheless, USD softness may well be overdone and shorts could be squeezed when GDP figures for the fourth quarter are released, which are likely to confirm yet more acceleration in growth in the US.

USDJPY is through support at 110 and bears can now focus on the 107.30 area, last September’s low. We then see longer-term support on 106.5, the 38.2% retracement of the Oct 2011-May 2015 rally, beyond that the next support is Jun-Sep 2016 lows at 100, the 50% retracement of that move and a mighty round number leg of support for USDJPY.

With EURUSD breaking resistance at $1.23230, the Jan 17th high, a move to $1.25 and then $1.26, the 61.80% retracement of the move from the $1.40 (2014 peaks) to $1.03, the low of Dec 2016. Fundamentals appear to be backing the euro bulls but there caution may be wise with the ECB unlikely to want to talk up the euro any further.

Elsewhere gold has rallied to a four-month as a result of the dollar’s softness. This is most clearly not a risk-off rally – it’s entirely down to the greenback’s weakness since December. 

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