Sterling is at the top of our watchlist this morning as the European Union leaders are gathering in Salzburg to discuss the specifics of Britain's exit agreement from the union. At the same time, the inflation report from the UK will also be closely monitored by investors that want to gauge prices' pressures in the Kingdom. The Dollar remains steady as China decides to retaliate to Trump's $200 billion tariffs salvo even though US 10-year yields cross above 3%. Equities in Asia are treading with a positive bias this morning while futures indicate a bullish opening bell in London.
The Pound will be front and center over the next couple of days as the EU leaders begin to discuss the final details of Britain's exit. Theresa May will present her plan today and the rest of 27 heads of government will hold a separate session without her tomorrow. Consensus is that they're inclined to offer May the soft kind of Brexit she's looking for and should this be the case, the Pound will rally on the back of the meeting. Cable is trading around 1.3150 holding steady for the past 24 hours in expectation of the meeting in Salzburg and our target - in case of a positive meeting as expected - still stands at 1.32.
The UK inflation report today may also have some effect in the price action and economists are looking for prices to have retreated slightly over the past month. This would have a bearish effect on the Pound but with the focus being on the Brexit progress and the currency on a strong uptrend any pullback today will likely be treated as an opportunity to buy Sterling lower in anticipation for a post-meeting rally. Technical support for Cable stands at 1.3120 and 1.3050 and as long as it remains above the latter the uptrend still holds strong.
The Euro came off its highs yesterday on the back of China's response to Trump's tariffs as the Asian nation decided to retaliate with levies of its own. The Dollar didn't react too much to the news but the shared currency moved lower to test the 1.1650 support confirming our suspicion that the double top pattern seen on the technical studies would drive a short-term pullback. The question now becomes whether the Euro can build momentum from these levels and look to push above 1.17 again or a deeper correction is what's next. Fundamentally the Single currency is well supported after the series of bullish Eurozone data and Draghi's optimism while a positive Brexit development will also benefit it. As such, we're inclined to hold a bullish outlook over the Euro but for further gains to come we need to see a clear break of the 1.1720 resistance.
Gold had yet another uneventful day yesterday oscillating around the $1,200 level as Dollar's reaction to China's decision to retaliate was minimal. The broader sideways channel between $1,190 and $1,210 holds true and as long as we trade within these levels we'll only look to play the range when Gold reaches these boundaries. Oil on the other hand spiked higher after Saudi Arabia commented that they would be happy with prices hitting $80 per barrel, a comment that underpins the upside potential for the black gold. The level to keep an eye on to the upside is the $71 mark and we'll focus on Oil reaching it over the next 24 hours.
Equities rallied yesterday around the globe and this morning futures on both sides of the pond are trending higher indicating that market participants are holding a bullish view over the current state of things. However, given the uncertainty surrounding global trade relations this bullish bias seems more like wishful thinking rather than a sober assessment of the situation. Granted, US and China still have some time to resolve their differences before their respective tariffs kick in but it seems unlikely that enough progress will be made until Monday when the levies are supposed to kick in. As such, we're holding a cautious outlook over global equities at this stage and even though we may see some short-term gains the tables could turn at any time.
MARKET EVENTS TO WATCH
- UK Consumer Price Index - 12.30pm
- ECB's Draghi speaks in Berlin - 5pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research