Sterling remains unfazed after the EU grants the United Kingdom a long extension to Brexit with May now forced to fight for her political future. The ECB sent a dovish signal yesterday as Draghi continues to see risks on the horizon but with the US inflation report printing in a bearish manner the Euro was able to hold above 1.12. Gold extended its rally but equities and Oil have now stalled their ascent.
Last night, Britain got an extension to the Brexit process until the end of October after a day-long meeting of the European Council. Theresa May wanted a short extension but the EC was adamant that the series of last-minute debates and emergency sessions needed to end and agreed to give the British PM a little bit more than 6 months to sort out a solution. The Pound didn't react much to the news as it is now May's turn to sell this extension to the British Parliament, which may be a battle of itself.
Hardline Brexiteers will have a go at May that had often promised to deliver Brexit when it was supposed to take place and her Tory leadership is now in jeopardy. It will be interesting to see how the debate in the Commons will go and whether May will be able to get her party to fall in line and vote in favor of the long extension. Despite the hard opposition she's expected to face, our central scenario is that the British MPs will ratify this extension and the Pound will gain as a result; the odds of a no-deal exit will diminish allowing consumers and corporations to go about their business for the medium term. The target to the upside stands at the 1.32 mark but be prepared for further volatility ahead as the question now becomes whether May will survive as PM.
Meanwhile, the ECB sent a dovish message yesterday when Mario Draghi focused on the downside risks during his press conference. The Euro sold off initially but a swift reversal followed, which poses the question why the shared currency recovered that quickly in the face of a cautious Draghi. The answer can be found partially in the performance of the Dollar that saw a simultaneous but mirrored price action: the greenback climbed in parallel with Euro's decline but quickly U-turned when investors were able to digest the last inflation data from the US.
The March CPI reading printed lower than expected, being yet another reason why the Fed can keep interest rates unchanged this year and may actually consider easing in 2020. 10-year yields dropped to fresh lows and with very few US-related data pending for release until the end of the week, the greenback looks vulnerable. Dollar/Yen broke below 111 and a further extension exposes the 110.50 area. In terms of the Euro, the concurrent Dollar weakness is keeping the currency pair supported but the outlook for the currency looks unfavorable. However, the key pivot point stands at the 1.12 level and we'd rather wait until this area is penetrated before we go full bearish on the shared currency.
Gold reached the $1,310 level yesterday after the Dollar saw a decline on the back of the US CPI report. The yellow metal has been on a rally for the past few days and the question becomes whether we should see more gains. This largely depends on the Dollar's price action, as there are no geopolitical risks currently affecting Gold's price action. And, even though some exhaustion is visible in the hourly charts suggesting a potential pullback, with the greenback in the backseat we may see another leg higher as long as the $1,300 level holds. Oil is consolidating around $64 after a buildup in US Oil inventories; the level to keep an eye on is the $63 mark and a potential correction lower would expose the $61.50 area.
Global equities were mixed with Europe scoring marginal gains and the US closing flat. This morning, futures on either side of the Atlantic are pointing towards a muted opening bell. As discussed yesterday, the US earnings' reports will be the next catalyst that will either push the indices higher, in case of continued corporate profitability, or send equities lower if investors start seeing further evidence of a domestic slowdown.
MARKET EVENTS TO WATCH
- US Initial Jobless Claims - 4.30pm
- Fed's Clarida Speaks at Annual IIF Meeting in Washington - 5.30pm
- Fed's Bullard Speaks on Economy and Monetary Policy - 5.40pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research