Tuesday, January 15, 2019

Pound hits 1.29 ahead of Brexit vote - early optimism or false rally?

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks

MORNING BRIEFING

Risk aversion gives way to a bullish bias today after yesterday's bearish tone that saw equities and currencies giving back earlier gains. It may sound like a rerun of an 80s TV series - where moments of joy would precede more dramatic scenes and around it goes again - but it seems that money markets are in constant state of flux in 2019. The Pound hits 1.29 ahead of the key Brexit vote in the Parliament today while the Dollar is higher against the Yen and Gold remains capped below $1,295. Equity futures point sharply higher while Oil finds support above the significant $50 area.

The most important event of the day will undoubtedly be the British Parliament's vote on Theresa May's Brexit plan. The vote is expected to begin at 7pm GMT and there's a lot of speculation over the potential outcome and its repercussions on the Pound and the Brexit process. The most likely scenario is that May will lose this vote but what comes after depends on the margin of defeat: if the draft is shot down by a small margin - say around 50 votes - then it's likely that May will go back to Brussels and try to negotiate some small concessions that will allow the bill to get approved by the Commons. In this case, we would see the Pound rally to 1.30 as investors will consider this as a positive sign that a final deal is very close.

However, in case of a large scale defeat for the British PM - a margin of more than 100 votes will signal this - then Theresa May will have little choice but to force a delay in the Brexit date and either call for a second referendum (the positive scenario) or general elections (the bearish scenario). Should this be the case then we're looking for the Pound to collapse to 1.27 at once but recover if a second referendum is called or proceed lower towards 1.25 if elections are called. In any case, volatility will be rather elevated in the Pound as we get closer to the time the results are released so caution is advised.

Dollar/Yen heads higher again after finding support from the 108 area and is now targeting the 109 level. Given the lack of any significant geopolitical catalysts, the currency pair is driven by the price action in the equities' market at this point. As such, with the US stocks pointing higher and investors keen to see how the earnings season will progress, Dollar/Yen looks poised from more short-term gains. Whether these would be extended above the 109 mark remains to be seen but with a number of factors affecting the currency pair, it's advisable to stay focused on the short-term for now.

Gold remains trapped within the same tight range for yet another day, but a series of higher lows suggests that a break to the upside is likely. However, the lack of any geopolitical risks keeps investors on the sidelines for now so we should wait for a meaningful drive above $1,300 before committing to any fresh longs. Oil has found support ahead of the $50 level and as long as prices hold above this area we should see another leg higher towards the $54 level.

Not much has changed over the past 24 hours in the equity markets and traders seem focused on the upcoming US earnings' season. At the same time, news that China is about to implement another round of tax cuts supports the notion that the Asian nation will do as much as possible to support the domestic economy and avoid a steep slowdown. Equities in Asia are trading sharply higher and futures in Europe and the US are pointing upwards so we should be in for a positive start for the day.

MARKET EVENTS TO WATCH

  • ECB's Draghi Presents Annual Report in Strasbourg – 7pm
  • Brexit Vote in UK Parliament - 11pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research