Wednesday, November 14, 2018

Pound rallies as May presents Brexit draft to her cabinet, US inflation also pending today

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

MORNING BRIEFING 

The Pound rallies on news that a Brexit agreement between the UK and the EU has been reached and details will be released by the end of the week. Does that mean that this is a done deal? Maybe not yet. The Dollar declines over the past 24 hours but with investors eager to see how the US inflation data will print today we may see a swift recovery. Oil drops the most in 3 years as OPEC's bearish forecast for demand comes at a time when stockpiles have been rising.

Sterling is front and center again as yesterday news leaked that the UK and the EU have reached an agreement on the pact governing the future relationship between the two post-Brexit. This news came on the back of the robust employment figures released yesterday and helped the UK currency rally above 1.30 but the important question is what happens now. Clearly the Pound is not out of the woods yet. As we have mentioned in our previous reports, the most difficult part is for PM May to sell this deal to her cabinet amid a round of recent resignations and worries that more will follow.

Theresa May is meeting with her cabinet later today to discuss the specifics of this supposed agreement and depending on the first reactions coming from her ministers the Pound will either extend its gains or collapse again. Earlier in the day though, the UK inflation reading will also be released and with expectations set for an uptick the Pound should remain well-supported going into the afternoon hours. If the cabinet meeting signals growing consensus regarding the Brexit agreement plan then Sterling may rally all the way to 1.32 today; otherwise, early indications that the British ministers reject the plan in front of them will push the UK currency towards the 1.28 level once more.

The Dollar retreated over the past 24 hours with no clear indication of what drove prices lower. The US currency's losses were more pronounced against the Euro and the Pound - on the back of the news regarding a Brexit agreement - and the commodity dollars with the Australian and New Zealand currencies ticking higher. Fresh news that the US and China are talking “at all levels” regarding trade relations ahead of the G-20 meeting stoked hopes for a cease fire between the two sides. Both the Australian and the New Zealand Dollars are sensitive to China-related news as they're both major exporters of raw material to the Asian nation and their currencies are closely correlated to Chinese industrial growth.

However, the Dollar may be in for another leg higher today as the US inflation data is pending for release and analysts are expecting a very robust reading. Higher inflation expectations would translate into investors betting that the Fed will remain ultra-hawkish over raising rates next year and it should push the greenback to new highs. Dollar/Yen has been trading sideways for the past 2 days so more stimulus to the upside will send prices above 114.20 and towards the 115 area. Having said that, investors should also keep an eye out for the Retail Sales data pending for tomorrow, in the off chance of an unpleasant miss.

Oil dropped the most in 3 years yesterday shedding almost 8% to trade to $55 as OPEC released their demand forecasts for the future. The bleak forecast came after a series of higher stockpiles readings and reports that US production is ticking higher dampening the outlook for Oil. Technically, the $55 level is a major support and its break in October last year kicked off the major rally that drove prices to $76 a year later. As such, it will be crucial to see how Oil will react to this test before we decide on its outlook going forward. Gold seems to be finding a short-term bottom but its price action will depend on the Dollar; with major reports coming our way today and tomorrow fresh pressure to the downside may send prices crashing towards the $1,184 level.

Equities ended the day in positive territory in Europe yesterday but the US session saw the major indices closing below water. News that the US and China are talking to each other again wasn't enough to push the US markets into the green and this morning futures on either sides of the pond are trending flat. The London FTSE 100 is the only exception predicted to open lower today ahead of May's meeting with her cabinet. Clearly news on this front and Italy's budget confrontation with the EU will dictate the direction in the markets today so investors should brace for potentially elevated volatility.

MARKET EVENTS TO WATCH

  • UK Consumer Price Index - 1.30pm
  • Eurozone Gross Domestic Product - 2pm
  • US Consumer Price Index - 5.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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