Tuesday, March 19, 2019

Sterling Comes Under Pressure As A Third Brexit Vote Gets Blocked

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MORNING BRIEFING
Sterling comes front and center at the start of the week with Theresa May's attempt to put her Brexit plan to another vote sabotaged by the House Speaker. John Bercow blocked the British PM from a third attempt suggesting that the bill needs to change significantly in order to be brought to the Commons again, with time running out on May. The Pound dropped to 1.32 but has recovered most of the losses overnight – the UK employment figures and the BoE decision are also scheduled for this week. The Dollar dropped against the Yen even though the US equity markets closed in the green, Gold and Oil advanced further.

The next few days will be crucial for the Pound's medium-term outlook. Theresa May seems to have failed to secure a deal that would satisfy the British MPs and, barring a last minute miracle, she now has to go to Brussels and ask for an extension to Article 50. She would rather get a short “technical extension” but it's more likely that the EU will agree on a longer delay and could also demand that a second referendum is held. Such a scenario would be positive for Sterling in the medium term, especially if a referendum is part of the agreement, but for this to happen May first has to actually ask. The EU Council meets on Thursday and time is running out for her to take action putting the Pound under pressure.

At the same time, today's employment figures will also attract the markets' attention with recent signs of weakness in the Services and Manufacturing sectors casting shadows over the release. Should the report print in a bearish manner and given the stalemate in regards to a swift Brexit resolution, the Pound may see fresh losses in the short term. The Bank of England's meeting later this week will do little to change the current state of play. As such, Sterling may first travel towards 1.32 and below, before we see a meaningful push above 1.3350 and towards 1.35 if and when a formal extension to Article 50 is announced.

The Euro managed to score a small advance during the first 24 hours of trading this week but failed to hold on to it. Prices made it to 1.1360 but pulled back, however we may see another attempt to push higher today in light of the ZEW Survey printing. German investors are expected to appear more optimistic about the future, with the Expectations component predicted to print higher and if this proves to be the case, the shared currency should continue trending higher. The Dollar is in a state of weakness right now so the Euro has the chance to hit 1.1370 and 1.14 in extension.

Gold reached the $1,305 level as expected on the back of Dollar's respite. A series of higher highs and higher lows indicates a short-term uptrend in place and a further continuation may see prices rallying towards the $1,310 level. Oil continues to trend to the upside on the back of fresh comments from OPEC+; the oil cartel committed to continued production cuts until June this year and prices have further room to the upside with the $60 level coming up on our sights.

Equities kicked off trading on a positive note with all the European and US markets closing in the green yesterday, apart from the German DAX. Futures in Europe trade flat this morning while the US markets are expected to open slightly higher with investors keeping an eye on the Brexit developments and the central bank meetings. The Fed and the BoE will keep rates unchanged and they will send a patient and cautious message respectively, which should keep the current uptrends in place.

MARKET EVENTS TO WATCH

  • UK Unemployment Rate - 1.30pm
  • German ZEW Survey - 2pm
  • Euro-Zone ZEW Survey - 2pm
  • US Durable Goods Orders - 6pm

All times are GMT +4.