Tuesday, July 30, 2019

Sterling stares into the abyss as Boris Johnson challenges the EU on Brexit

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

MORNING BRIEFING

Sterling dropped to its lowest level since March 2017 after the new British Prime Minister Boris Johnson took a hard stance against the EU asking for the previously negotiated deal to be re-opened for discussion. The initial response from the European side was not a positive one and the outlook for the Pound looks rather bleak. Prices have fallen close to 1.21 overnight when Cable was trading around 1.24 at the start of the week. The focus now falls on the Bank of England’s meeting later this week and investors are worried that the UK policymakers will tilt towards a more cautious outlook, reducing any likelihood for a rate hike when Brexit is resolved. Such a change in rhetoric from the BoE will not bode well for Sterling and the downside bias may lead the British currency below the 1.20 mark in the weeks ahead.

Meanwhile, the Euro held its own against the Dollar yesterday and started the week hovering above the 1.11 figure. Nevertheless, the bias remains bearish, especially after Mario Draghi clearly hinted on an easier policy ahead citing the very obvious signs of sluggish growth in the Euro area. In terms of fresh data, German and Eurozone inflation figures and the GDP report from the Euro area will be released over the next 48 hours and economists are expecting a soft printing. Having said that, the FOMC meeting which starts today and the interest rate decision due for tomorrow will be the main catalyst for the Euro/Dollar pair. If Jerome Powell leaves the door open for more rate cuts later in the year, the Euro may attempt to bounce higher but this wouldn’t change our bearish outlook given the almost absent growth in Europe and the still ongoing Brexit saga.

Obviously, the main event of the week will be the 2-day Fed meeting and the interest rates’ decision which will be delivered tomorrow. Consensus is in favor of a 25bps cut from the US central bank and given the Dollar’s price action over the past month we believe that such a decision has been fully priced in by now. What’s not certain though is what Powell has to say in regards to the Fed’s forward guidance: will he offer a bullish outlook which would point towards a steady policy going forward or will he telegraph more rate reductions to be expected by the end of the year? In the former case, the Dollar will extend its advance and drive its counterparties lower but if the takeaway suggests a continuation of easing then the greenback will start giving back its recent gains.

Gold edged higher yesterday and prices moved towards the $1,430 mark but the lack of follow-through indicates that investors are playing it safe ahead of the Fed meeting. Clearly, the yellow metal’s price direction hinges on what kind of outlook the US central bank will deliver: given that the decision to cut rates seems guaranteed, Gold could see a knee-jerk reaction to the upside when this becomes official but the way forward from there depends on Powell’s remarks. A positive tone, indicating an “one and done” approach that will keep rates steady for now will weigh down on Gold and we could see prices retreating towards the $1,400 area. Otherwise, a dovish takeaway paving the way for more cuts this year will set fire on Gold and drive prices to the $1,450 mark.

Equities were almost flat during the first 24 hours of trading this week with the EuroStoxx 50 closing marginally below water and the US indices on either side of their previous closing price. This morning though equity futures around the world are pointing towards a bullish opening bell, which could only be explained by the prospect of easier monetary policies from the major central banks. Will that be enough to extend the recent rallies though? We remain unconvinced, especially in regards to the medium-to-long term.

MARKET EVENTS TO WATCH

  • German Consumer Price Index - 4pm
  • US PCE Core - 4.30pm
  • US Consumer Confidence Index - 6pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research