Wednesday, December 12, 2018

Sterling may suffer further losses if Theresa May faces a leadership challenge

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

MORNING BRIEFING

The Pound drops once more as Theresa May is about to face a leadership challenge, according to the most recent news. Prices versus the US Dollar dropped below 1.25 overnight when the rumors emerged while the Euro was also lower for the day coming close to the 1.13 mark. The Dollar gains as investors hope that a trade truce between the US and China is within grasp, with equities rallying and Gold consolidating near its $1,245 lows.

Sterling is making headlines again. Following Theresa May's decision to postpone the Brexit agreement vote in an attempt to gather more support, news now suggests that she's about to face a leadership challenge from within her own party. According to British media, the required 48 letters to call for a challenge have reportedly been gathered and developments are expected within the day. The Pound dropped to 1.25 as the news hit the wires and the currency's outlook now hinges on how the situation unfolds.

A leadership challenge that would trigger a period of uncertainty over who's going to lead the UK going forward - and what his or hers Brexit strategy will be - does not bode well for the Pound. With prices breaking recent lows there's a vacuum of support all the way to the 1.2350 area before any significant demand may emerge. However, there's also a potential positive spin to this story, depending on what the takeaway from this challenge will be: if we seem to head for a new round of elections and there's a chance that a second referendum is called or a party runs on the promise to cancel Brexit then the Pound will rally. There's still a lot of ground to be covered before we get some clarity on what's next so investors should brace for more volatility in the coming sessions.

The Dollar has been gaining since the start of the week and recent news that the US and China are talking on all levels underpins the greenback and improves risk sentiment. The release of Huawei's CFO on bail is a positive step in diffusing trade tensions between the two nations and Trump's comment that he may intervene in the case if it helps negotiations suggests that he's willing to make some kind of a deal. However, we remain cautious over the greenback's outlook ahead of December's FOMC meeting; we still believe that the Fed will hike rates one more time this year but they may provide a more cautious forward guidance signaling a slower pace in 2019. Should this be the case, the Dollar will struggle to rally further on its own and any gains versus the DM currencies will come as a result of weakness from their side. The reading of the US inflation data today may further support this view if it prints on the softer side, as expected.

Gold consolidates around the $1,245 level over the past 48 hours indicating a lack of momentum. The Dollar has been strengthening in recent sessions and this caps Gold's upside; however, if the Fed signals a more cautious interest rate policy next year the yellow metal may rally all the way to the $1,265 level. Oil found support just below the $51 mark and is pointing higher this morning, more gains towards the $54 level should be in the cards.

Equities had a great day yesterday, especially in Europe, as risk sentiment improved on the back of the US-Chinese trade talks. Investors seem unfazed by the political troubles in Europe, with May's leadership challenge and Macron's attempt to end the riots in France. This only suggests that traders are focused on the macro picture, where the encouraging signs from the Sino-US talks and the prospect of slower monetary tightening next year allow for optimism. Futures on both sides of the pond are pointing higher so we should be in for a positive day ahead.

MARKET EVENTS TO WATCH

  • US Consumer Price Index – 5.30pm
  • DOE U.S. Crude Oil Inventories – 7.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research