A lack of progress in the Brexit talks was revealed yesterday in Salzburg and the Pound's outlook is now in question as EU leaders are meeting for a second day in Austria. The UK Retail Sales data is also pending for release during today's session and Sterling traders will look to re-adjust their positions in light of the fresh news and incoming figures. The Dollar remains unchanged versus the European majors while it declined against the Yen and the commodity currencies. Gold and Oil are on the offensive while equities are expected to kick off today's session in a mixed manner.
The Pound remains front and center as EU leaders continue their meeting in Salzburg but yesterday's news was far from exciting. A downbeat tone coming from both sides revealed that there has been little progress in recent months and even EU head Juncker said that a Brexit deal is still far away. The only reason why the Pound hasn't collapsed yet is the surprise in the inflation reading yesterday that came in far stronger than expected which could force the BoE to raise rates again sooner than anticipated.
In the short-term though, Sterling's price action will hinge on further news coming from Austria and today's retail sales data. The risks for the Pound are skewed to the downside as there's a high chance that the EU leaders' meeting today might end without any concrete progress given the newly revealed lack of progress. At the same time, the consumer spending data is expected to come in considerably weaker after last month's surprisingly high reading. Should this be the case, the Pound will likely retreat as short-term traders will look to reduce their long exposure in light of the bearish Brexit prospects; 1.3050 remains the key support and as long as the Pound remains above it then the broader uptrend would still be alive but a short-term correction seems the next step for now.
The Dollar was mostly on the defensive yesterday with losses seen against the Japanese Yen and the commodity dollars as the less severe tariffs from both sides allowed the AUD, NZD and CAD to benefit. Treasury yields are still trading above the 3% mark but the Dollar has failed to react and the consensus is that investors are happy that the soon-to-be-imposed tariffs are softer than initially feared. However, we believe that this notion is very short-sighted and with the US and China not willing to come back to the negotiating table things could get uglier in a hurry. Currencies and equities would take a significant hit if things would deteriorate so caution is highly advised.
Gold trended higher yesterday hitting $1,205 overnight as Dollar's lack of momentum allows the yellow metal to build up some momentum. Nevertheless, Gold is still trading within the broader sideways pattern we've highlighted many times and we will look for a reversal as soon as it reaches the upper end of this formation. Oil is a similar case with Gold with prices rallying to the $71.50 area as we expected following bullish remarks from Saudi Arabia about prices hitting $80 per barrel. Technically Oil is now facing a strong resistance level but if it manages to overcome it then we may see prices reaching the $73 and $74.50 levels soon; otherwise a correction towards $68.50 is likely.
Equities had a mixed day yesterday with the European markets closing above water while their US counterparties were mostly in the green as well. The Asian bourses are trading with a mixed bias ahead of London's opening while futures on either side of the pond indicate a muted opening bell as well. Investors may start to grow uneasy as the deadline for the US/China respective tariffs draws near and no progress is seen hence the lack of appetite this morning. As said in our previous note yesterday, we'd rather remain on the defensive as investors may be underestimating the potential toll this trade dispute could take on global growth and losses may come rushing in when reality hits.
MARKET EVENTS TO WATCH
- UK Retail Sales - 12.30pm
- US Initial Jobless Claims - 4.30pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research