The Pound rallies to 1.33 amid optimism that a no-deal Brexit is finally off the table after Theresa May agreed to allow the Commons to vote for an extension to Article 50, if her efforts to secure a deal soon fail. The British currency has seen a 3% rally over the past few days as investors are reducing their short exposure to Sterling. The Dollar saw mild gains after the US Trade Representative said that for a full-blown trade deal to be achieved China needs to overhaul its practices. Gold retreated deeper to test the ascending trendline supporting its gains since December last year while Oil recaptured the $57 area.
Sterling is front and center as the Brexit date is approaching fast but it seems that the catastrophe of a no-deal exit from the EU will be avoided. The British Parliament approved Theresa May's pledge to allow the Commons to ask for a delay in the Article 50's deadline, in case her efforts to find common ground with the EU over the next 2 weeks fall through. Given the lack of progress seen in the recent talks between the two sides, it looks unlikely that anything substantial will be achieved in such a short span of time. As such, the central scenario at this time calls for a postponement of Britain's exit and fresh rounds of negotiations between the UK and the EU.
The Pound rallied above 1.33 on the back of this news as investors are seeing more and more signs towards an amicable divorce. From a technical perspective, the UK currency also looks poised for more gains having cleared the 1.3220 resistance that acted as a ceiling a few times over the recent months. So what's next then? If May doesn't succeed in getting concessions from the EU over the next 2 weeks, a delay in Brexit appears highly likely and this points towards more gains for Sterling. The medium-term target for the currency pair stands at the 1.35 area, with an interim barrier around the 1.3350 level. At the same time, EUR/GBP looks weak and the next area of interest to the downside can be found at the 0.84 level.
The Dollar was able to score a small advance yesterday on the back of the headlines coming out of the US-China trade talks. US Trade Representative Robert Lighthizer mentioned that there is progress being made, hinting on a further deferment of raising tariffs on Chinese goods, but also said that for a proper deal to be agreed China needs to overhaul its economic model. The Euro, the Yen and the commodity dollars came off their recent highs as the balanced comments from Lighthizer somehow reduced the risk-on flows in the FX universe.
Gold saw a deeper decline yesterday as we have expected due to the improvements seen in several geopolitical fronts. Prices are now trading around the $1,320 area and the trendline supporting the yellow metal's gains since December last year now comes under threat. This will be a key test as a break below this and a penetration of the interim support at $1,315 would expose the $1,305 level, in case Gold's prices continue to tumble. On the other hand, Oil rallied again climbing above the $57 mark and the swift U-turn to the upside seen over the past 2 days underpins the bullish outlook for the commodity; our target at $58 remains unchanged.
Equities had a rather lackluster day yesterday with most indices ending the day below water. This morning futures in Europe and the US are pointing towards a bearish opening bell, suggesting that investors are not convinced that the progress in geopolitics and Fed's patient approach will be enough to push stocks higher. Recent comments from several policymakers in regards to slowing global growth soured investors' sentiment, begging the question whether we should prepare for another rally lower. In our opinion, it's too early to look for a reversal so patience is key right now.
MARKET EVENTS TO WATCH
- German Consumer Price Index - 5pm
- US Initial Jobless Claims - 5.30pm
- US Gross Domestic Product Annualized - 5.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research