June 21 (Reuters) - Sterling traders as well as psephologists will watch for any signs of a shift in the UK's political tectonic plates following last week's by-election shock in a former 'blue wall' stronghold.

If the Liberal Democrats build on their unexpected victory in Chesham and Amersham - which Prime Minister Boris Johnson's Conservatives had held comfortably since its creation in 1974, it could raise the stakes for GBP at the next general election. nL5N2O021N

The current consensus view is that the Conservatives will win another majority at that election (which is at least 23 months away).
Should the Conservatives fail to win a majority in 2023/2024, it could open the door to a rainbow coalition led by Labour and including the SNP - the price of whose support would be a green light for another Scottish independence referendum.

The next by-election test for the Conservatives is in Batley and Spen next week (July 1).
Odds quoted by Ladbrokes suggest Johnson's party has a 73% chance of winning the seat from Labour.

Related comments: nL1N2MY0LSnL1N2MX0HB

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The Bank of England meets this week and there might be a policy shift, easing the recent bearish strains on sterling.
However, a rise in delta variant COVID infections, leading to a delay in easing social distancing restrictions, underlines the fact that the pandemic still has a hold on the UK and the pound.

Sterling is attempting to correct six days of losses versus the dollar and some in the market may see perceived value ahead of the BoE meeting.
A squeeze above the 1.3940 100-day moving average could trigger a stronger sterling reversal.

May's UK inflation surprise to the upside could justify a shift in BoE policy.
A pick up in five-year yields suggests the market might be positioning for a hawkish spin, leading to a yield topside break from established ranges.

Recent sterling weakness was rooted mainly in the unwinding of long positions as a surprisingly hawkish FOMC boosted the dollar nL5N2O0105, but was also linked to disappointing UK data and the delay in easing restrictions from June 21 to July 19. nL2N2NZ0ZSnS8N2LL05A

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• Cable reaches 1.3878 after pushing its recovery envelope from 1.3787

• 1.3787 was nine-week low in Asia (1.3791 was Friday's low) nL2N2O30CO

• GBP lifted by M&A news, re: CD&R's GBP 5.5 billion cash offer for Morrisons

• See: nL3N2O31UP. 1.3900 (former support point) is now a resistance level

• 1.3896 was last Wednesday's low, after USD jumped on hawkish Fed dot plots

• GBP/USD was at 1.41 when dot plots published. BoE MPA Thursday nL5N2O03IF

• Cable rises to 1.3837 as Morrisons shares jump 30% nL9N2DZ011nL3N2O31TC

• On Saturday, Morrisons rejected GBP 5.5 bln cash takeover offer from CD&R

• See: nL2N2O109D. 1.3837 = intra-day high (1.3829 was Asian session top)

• Offers may emerge near 1.3856 (Friday's Ldn am low) if GBP/USD extends north

• 1.3787 was nine-week low in Asia (1.3791 was Friday's low) nL2N2O30CO

• UK minister says pension 'triple lock' not under threat nL5N2O30X4

• EUR/USD finds support at peak of weekly Ichimoku cloud

• Last week's EURUSD low 1.1847 cloud top 1.1833

• This week's low 1.1848 EBS, cloud top 1.1867

• Cloud top rising steadily to reach 1.2063 by end-July

• Potentially cloud could support slowly rising ranges this summer

• More probable ranges drop from prior 1.19-22 closer to 1.17-20

• EUR/USD unlikely to drop below cloud base 1.1473 and 100-WMA 1.1501

• Slumping U.S. yields suggests USD will soon lose bullish momentum

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• EUR/USD's big drop last week closed under the 1.1919 Fibo

• 1.1919 Fibo is a 61.8% retrace of 1.1704 to 1.2266 (March to May) EBS gain

• Scope for bigger losses through 1.1837 Fibo, 76.4% retrace of the same rise

• A break, daily close under major 1.1837 Fibo would weaken further

• That would unmask the April 1.1795 low for a test

• The dollar chart is pointing to even bigger gains nL2N2O00LE

• EUR/USD Trader TGM2334. Previous update nL2N2O00EN

• EUR/USD 1.1800 (320M), 1.1860 (522M), 1.1900 (554M)

• 1.1925 (520M), 1.1940-50 (975M)

• USD/JPY 109.50 (260M), 110.00 (1.2BLN), 110.50 (860M)

• EUR/GBP 0.8575 (465M), 0.8620-30 (345M)

• AUD/JPY 78.00 (1.24BLN), 81.00 (1.2BLN)

• USD/NOK 8.66 (200M)

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• Flat in a 1.3800-1.3829 range with plenty of interest

• Asian stocks fell, with UST yields, 10yr -5bp to 1.398%, Emini S&P -0.6%

• UK house prices show biggest seasonal rise since 2015 Rightmove nL2N2O109O

• Move from central London to the leafy suburbs and further continues

• Charts; daily momentum studies 5, 10 & 21 daily moving averages fall

• 21 day Bollinger bands expand - signals support a strong downtrend

• Pace of last weeks 2.5% fall leaves studies oversold, but trend is strong

• Trend pause possible, as oversold unwinds, and UST yields fall nL2N2O300MFor more click on FXBUZ

  
  

Sterling is bid in Asia on Monday, driven by profit-taking and bargain-hunting after last week's 2.5% fall.
This may prompt a pause in the downtrend, allowing oversold technical signals to correct, as lower U.S. Treasury yields cap the dollar.

Last week's sterling fall was largely based on USD strength, as long-held short positions were unwound following the more hawkish Federal Reserve meeting. Fed speakers provided mixed signals on Friday, with a hawkish James Bullard nL2N2O0136, later countered by a dovish Neel Kashkari nW1N2MT03J.

Ten-year Treasury yields initially spiked to 1.594% after the FOMC, on the Fed's more hawkish outlook, but have since fallen sharply, sliding to 1.411% early Monday.
The perception that the Fed will be able to control inflation has prompted a rethink in markets that were positioned for higher rates.

The lower long-term Treasury yields should slow the rise in the USD, providing a floor for GBP/USD this week.

Technically daily momentum studies 5, 10 and 21 daily moving averages fall, which is a strong bearish trending setup.
The 1.3866 lower 21-day Bollinger band is a good indicator of an oversold market, especially as the move becomes more mature.

A period of consolidation is viable, as UST yields cap the dollar, while 1.3756, 61.8% of the 2021 rise, is key GBP/USD support.

• AUD/USD is up 0.40% in early trading and appears bid above 0.7500

• AUD worst performing currency last week - but outperforming this morning

• Call by West Pac that RBA will hike Q1 2023 appears to be resonating

• They argue RBA's employment and inflation goals will be reached sooner

• RBA on record as saying they didn't see goals reached until 2024

• AUD/USD resistance is at 200-day MA at 0.7553 and break would ease pressure

• Support is at the 61.8 of the 0.6990/0.8007 move at 0.7378

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• +0.2%, as the USD trades softer early on profit taking, bargain hunting

• UK plan to capitalise on science and technology breakthroughs nL5N2O206S

• PM Johnson believes R&D is crucial for the UK's post Brexit renewal

• Charts; daily momentum studies 5, 10 & 21 daily moving averages fall

• 21 day Bollinger bands expand - signals support a strong downtrend

• Close below 2.3803 May low was a bearish bearish signal for this week

• NY 1.3791 base and 1.3832 NY afternoon high are initial support, resistance

• Pace of last weeks 2.5% fall leaves studies oversold, but trend is strong

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• EUR/USD eased 0.32% Friday after USD broadly formed on Bullard comments nL2N2O0136

• The pair has fallen over 2.0 % since the more hawkish than expected FOMC

• Support is at the 76.4 of the 1.1704/1.3366 move at 1.1836

• A break below 1.1835 targets the year's low at 1.1704

• Resistance is at Friday's high at 1.1925 and 200-day MA at 1.1996

• EUR/USD trending lower with 5, 10 & 21-day MAs in bearish formation

• Fed-speak this week may cause some volatility in near-term

• NY Fed President Williams speaks today while Fed Chair Powell speaks Tuesday

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• AUD/USD trading above 0.7490 in early Asia after closing Friday at 0.7478

• AUD/USD fell nearly 1.0% on Friday and was down nearly 3% for the week

• Risk-off mood and diverging RBA/Fed expectations pressured AUD/USD last week

• AUD/USD likely to remain heavy as risk assets correct on hawkish Fed shift

• Resistance is at the 200-day MA at 0.7553 and break would ease pressure

• The target of the AUD/USD trend lower is the 38.2 of 0.6990/0.8007 at 0.7378

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The dollar extended this week's Fed-inspired gains on Friday after St.
Louis Federal Reserve President James Bullard bolstered policymakers' hawkish message to markets nL2N2O0136nL2N2O01JU, which sent EUR/USD to a 10-week low.

It took a risk-off response from stocks, which ultimately pushed Treasury yields lower, to temper the dollar move.

EUR/USD fell 0.28%.
After 2-year Treasury yields spiked to their highest in a year, EUR/USD fell to a 1.1847 low on EBS, nearly reaching the 161.8% Fibo projected low off the May 25 to June 4 drop and the 76.4% Fibo of the March-May advance at 1.1842/36.
The low also nearly hit the 1.18335 weekly cloud top, with daily RSIs their mostly oversold since last February.

The dollar index's 92.408 high completed its 161.8% Fibo objective off its May-June base.
A dollar correction to reset overbought studies could offer a good buying opportunity near the 200-day moving average that initially caught EUR/USD's Fed meeting fall Wednesday, and now stands at 1.19958 by Thursday's 1.20065 high.

Sterling fell 0.75% following a bigger-than-forecast retreat in UK retail sales from April's 9.2% m/m surge nL5N2O0105 and with lingering concerns about full UK reopening due to a rise in COVID variant cases.

The pound, which had its worst week since September, marginally pierced the April-June rise's 76.4% Fibo and late April lows at 1.3806/03 with a 1.3795 low.
As with EUR/USD, GBP/USD's fall this week was likely accelerated by net spec longs having to sell.

Sterling is also highly positively correlated to S&Ps, which were having their worst week since February and probed often-pivotal 55-day moving average support ahead of the close.

USD/JPY fell 0.1% after an early low at 109.945 that was supported by 110 options interest ahead of Wednesday's 109.80 low.

The bullish initial reaction to Bullard sparked a spike to the 110.485 high, a 61.8% Fibo of the fall from Wednesday's 110.825 high to Friday's low and by popular 110.50 options expiries next week.

Friday's BOJ meeting left in place the negative policy target and zero 10-year target nL2N2NZ33G, leaving Treasury yields swings as the main factor in Treasury-JGB yield spreads.

Those spreads were thrown into disarray by the this week's pricing in of Fed tapering and eventual tightening that flattened the yield curve, allowing USD/JPY to rise despite 10-year yield spreads falling to their lowest since early March.
That normally USD/JPY bearish event was offset by 5-year yield spreads surging toward April's pandemic highs.

Aussie fell 0.65%, and hit 0.7479, its lowest since December, getting below the 50% Fibo of the November-February rise at 0.74985, but not the 50-week moving average at 0.7475.

Bitcoin and ether fell to their lowest in a week and since May, respectively.

Other than Fed speakers and U.S. existing home sales on Tuesday, there's little economic event risk until global PMIs for June are released on Wednesday.

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• USD/JPY off slightly and back by middle of the day's 109.945-10.485 range

• Lowest 10-year Tsy-JGB yields spreads since early March limits rebounds

• But 5-year spreads are closer to week's and 2021 pandemic highs

• Increase Fed tightening prospect bear flattens the yield curve

• Fed's Bullard briefly lifted Tsy yields, but mostly flattened the curve

• USD/JPY's June uptrend intact while above Wednesday's 109.80 EBS low

• But June and January 110.825/97 pandemic peaks loom

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• GBP/USD off session lows, ends NY -0.72% at 1.3826; NY range 1.3904-1.3795

• Pair slid initially on weak UK ret sales, fell harder after hawkish Bullard

• Hawkish Fed take by Bullard leaves mark on sterling outlook nL2N2O01B0

• Weak UK retail sales dents hawkish BoE narrative for June 24 MPC meeting

• Next key GBP/USD supports 1.3670 Mar/Apr lows, 1.3463 50% of 1.2676-1.4250

• EUR/GBP +0.46% at 0.8591, Fri range 0.86-0.8545; EUR led lwr post-Fed, RS miss drives GBP selling

MUFG Research discusses the EUR outlook and adopts a neutral bias around current levels.

"The question now is with dollar sentiment more positive will market participants return to running large EUR shorts? The turn from long to substantial short from 2017 into 2018-19 reflected the downturn in economic growth after the false optimism of 2017 and the heightened global trade uncertainty under President Trump. Over that period EUR/USD fell from 1.2500 to around 1.1000 before COVID hit. In our view what lies ahead certainly suggests limited risks of any renewed build-up of large short EUR positions," MUFG notes.

"We believe the outlook in Europe is not consistent with a renewed large build-up of EUR short positions in the market with portfolio flows also set to support EUR," MUFG adds.

• EUR/USD bears score wins on breaks of bull channel base, April 7 2021 low

• Pair hits 2-1/2 year low, trades to 1.1847 on EBS and then bounces

• Bounce occurs near 76.4% Fib of 1.1704-1.2266, daily bull hammer forms

• Daily RSI is oversold, implies downside momentum might start to wane

• EUR/USD still below the daily cloud & 200-DMA, rallies likely to be sold

• Tests of April, November monthly lows still remain a possibility

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UOB Research discusses its updated outlook and targets for EUR/USD and USD/JPY.

"EUR/USD: Going forth, EUR/USD may also draw further support from the bloc’s EUR750bn recovery fund which is on track to make its first disbursement this summer. However, the latest hawkish shift from the Fed is an important new catalyst that may have cemented the EUR/USD’s double-top at around 1.23. From here, we see a period of consolidation for EUR/USD at around 1.19 across 3Q21 and 4Q21, followed by a retreat to 1.17 in 1Q22 and 1.16 in 2Q22," UOB notes. 

"USD/JPY: With 10-year Treasury yield edging higher towards 2% by end-2021 while 10-year Japanese Government Bond yield stay tethered at 0% due to BOJ’s yield curve control, a widening yield gap would spur outwardly investment and exert upward pressure on the USD/JPY. Hence, we update our USD/JPY forecasts to 112 in 3Q21, 113 in 4Q21 and 114 in both 1Q22 and 2Q22," UOB adds. 

GBP/USD fell on Friday, hitting a 6-week low at 1.3825 nL2N2O0143 after St.
Louis Fed President James Bullard delivered hawkish reinforcement to the U.S. central bank's message this week, which could hobble sterling's outlook, unless the BoE keeps pace at its June 24 MPC meeting nL2N2O00NA.

Thursday's break below key GBP/USD support at 1.3960, the 50% Fib of its 1.3670-1.4250 rise, and dip below the daily cloud led traders to reduce long positions built up this year on vaccine roll-out and post-Brexit optimism.

That enthusiasm for the pound had already started to suffer from emerging Brexit frictions and the delays to final stages of post-pandemic reopening.

As markets acclimate to the more hawkish Fed, GBP/USD could remain capped at recent highs above 1.4200 as it had been for much of May and early June.

Support for the pound comes in at 1.3803, its April 3 and May 3 low, followed closely by its recent trend low at April 12's 1.3670, with the 200-day moving average underpinning price at 1.3595.

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Bank of America Global Research maintains a core bullish USD bias but argues caution in the near-term.

"Although we remain constructive on the USD post-FOMC, we would also urge for caution as we still see too many moving parts. We would not expect the USD path to be smooth. Data can be volatile given strong base effects. Inflation in particular will start coming down after the base effects are behind and could take few more months to have a better picture of the extent to which some inflation may be more persistent," BofA notes. 

"The Fed policy normalization will be very slow and the overall policy stance will remain very loose during the process. European data is also now improving during the reopening. Summer seasonality is good for the EUR, although this depends on the summer season which remains subject to risks as long as the pandemic is not over. The ECB Strategy Review this September is another important known unknown, and as we have been arguing, it could go either way for the EUR," BofA adds. 

Credit Agricole CIB Research discusses CAD outlook and sees a scope for an extension in USD/CAD recent rebound on the widening of the USD-CAD short-term rate differentials.

"The CAD outlook has continued to deteriorate recently, in an interesting turn of events for hitherto one of the preeminent carry investment currencies in the G10 space. Indeed, it seems that the latest rebound n USD/CAD correlates well with the latest widening of the USD-CAD short-term rate differentials. It further seems that resilient oil prices have not been that supportive for the CAD, suggesting that the market focus remains on the currency’s loss of rate advantage at the moment," CACIB notes. 

"Next week, FX markets could focus on the release of Canadian retail sales for May," CACIB adds. 

• Brief overnight lift meet sellers in the 0.7560/65 area, slide ensues

• Sinking equities ESv1, rising US$ trump bounce in copper, iron-ore

• Soured risk leads to buys of safe-haven yen, US$, AUD/JPY nears 82.75

• AUD/USD falls below the 200-DMA, breaks April's low, hits a 6-month low

• Pair hits 0.7511, defense for likely 0.7500 barrier options stems slide

• Daily, monthly RSIs imply downside momentum remains though, lower levels due

• Stops likely below 0.7500, if run Dec 21 daily low (0.7463) is targeted

• 0.7400/05, 0.7340/50 are supports thereafter should the Dec 21 low break

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• Dollar remains underpinned by hawkish Federal Reserve nL2N2O00LE

• BOJ likely to lag behind U.S. in ending crisis-mode policies nL2N2NZ33G

• Yen set to suffer a while longer as BOJ baulks at tapering nL2N2NM0B9

• USD/JPY fell from 110.33 to 109.95 on Friday, according to EBS data

• But setback likely to be short-lived, daily chart positive nL2N2O00H9

• Large 110.00 NY cut expiry could limit trading in early NY

• USD/JPY, EUR/JPY 30-day log correlation under +0.5, weak relationship