Tuesday, March 26, 2019

Sterling In Focus As British MPs Seize The Brexit Process, The Dollar Remains Vulnerable

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

MORNING BRIEFING
The Dollar was lower almost across the board at the start of the week which saw a slow and uneventful first day of trading. The US currency dipped lower against its peers with the exception of the Pound as US Treasury yields dropped below 2.4% for the first time since December 2017. Sterling is holding around 1.32 as British MPs have seized control of the Brexit process for a day in an attempt to put forward different divorce options, potentially including a second referendum. The Euro was able to capture some gains on the back of Dollar's slide, while the commodity dollars led the charge. Equities were marginally in the red, while Gold and Oil advanced.

The inversion of the 3m/10y yield curves along with the 10-year UST yield dropping to new lows for the year are driving the greenback lower. Following the Fed's decision to leave interest rates unchanged for the remainder of the year, these new catalysts are now weighing down on the US currency that sees little support on the horizon. There are a couple of important US-related reports during the remainder of the week, like the US GDP figures on Thursday and the PCE report the next day, but expectations are set for another round of mild data.

On Sterling though, there's been much action over the past 24 hours. Initially, there were reports that May will push for a third attempt to get her Brexit deal through the Commons but the British PM later conceded she didn't have the necessary support to get the deal over the line. Nevertheless, Sterling remained little changed, trading on either side of the 1.32 mark but today it's the British MPs' turn to take matters into their own hands. Parliament has seized control of the Brexit process for the day in an attempt to introduce alternative options for a vote, potentially a second referendum or a revoke of Article 50 altogether.

Depending on the way the various votes result today, the Pound will see further price action. Clearly, the most bullish scenarios include a vote in favor of cancelling Brexit completely or at least a second referendum taking place. However improbable these scenarios are, the Pound may gain considerably should they come true, with the 1.3350 and 1.35 areas the immediate targets in such a case. Albeit, given the divided state of the British Parliament, it seems more likely that the voting process will result into nothing and the stalemate will continue, which should push the currency lower towards the 1.31 area, as nervousness will persist.

Gold is seeing a correction this morning after having hit the $1,325 level overnight. The yellow metal has been on an extended run since Thursday, moving $20 higher before retreating. Currently, the support is found around the $1,310 mark and as long as prices hold above this, more upside is possible over the near term. Oil consolidated around the $59 level yesterday and today is making an attempt to move higher again; if prices manage to overcome the $59.50 level again then a further extension into the $60 area appears likely.

Equities started the week slightly in the red with the European and US markets closing marginally below water. However, today seems to be one of those “turnaround Tuesdays” as futures on both sides of the pond are pointing sharply higher. We discussed yesterday how the steady Fed policy and potential new round of QE from the ECB create opportunities for stock investors and it seems that market participants agree with us. As such, we should be in for a positive opening bell today.

MARKET EVENTS TO WATCH

  • US Housing Starts - 4.30pm
  • US Consumer Confidence Index - 6pm

All times are GMT +4.