The Pound ended the week on a positive note on Friday managing to recover above 1.28 but the worst may not be over for the British currency. Theresa May will be meeting with business leaders today to sell her Brexit plan as rumors that a leadership challenge may still be imminent continue to circulate. The Dollar fell further on Friday with the Euro, the Yen and Gold pushing to new highs while equities were mixed with Europe in the red but most US markets closed above water.
As we draw closer to the agreed date for the European Union's emergency summit on Brexit the stakes for PM Theresa May couldn't be higher. The British PM is battling to get her Brexit draft through the Parliament while also keeping her job, a challenge unlike any other. Today May will be meeting with leaders of business as she plans to “hammer out the full and final details” of the plan this week, according to Reuters. The price action for the Pound will obviously hinge on news from this front: rumors that May will succeed in getting the agreement through the Parliament will send prices above 1.30 again but if rebels within the Tory party pose a formal leadership challenge more volatility will be witnessed.
The Dollar starts the new week on the back of the lackluster performance seen during the previous one. The US currency wasn't able to close in positive territory and this may signal the start of the bearish move towards the end of the year we've been warning about. Recent data from the US has been decent but comments from Fed officials haven't been particularly helpful as Fed Chairman Powell and Vice Chairman Clarida appeared not as hawkish as some (or most) investors were hoping. Powell warned about the headwinds the US economy is facing, hinting on trade uncertainty, while Clarida suggested that limited rate hikes are now needed to bring rates to neutral. With the US currency on the back foot, Dollar/Yen broke below 113 and further weakness may send prices towards the 112 area, with trade war sentiment and equities' performance the potential catalysts underpinning further Dollar losses.
The Euro ended last week above 1.14 completely unfazed by the softer ZEW Survey data. It has been Dollar's under-performance that has helped the shared currency proceed higher and we expect more of the same this week. As mentioned above, the Dollar is going through a phase of weakness and this persists then the Euro may see further gains all the way to 1.15. At the same time, a conciliatory tone coming from Italian Deputy PM Di Maio may help improve sentiment further as he appeared more willing to adjust his budget to meet some of EU's demands, as long as “the big reforms remain in place” according to Bloomberg.
Gold benefited from Dollar's lack of confidence and hit $1,225 on Friday, currently trading $5 lower. The yellow metal's gains are driven by both a weaker Dollar but also worries about the Sino-US trade war after US Vice President Pence appeared less willing to accommodate a cease-fire with China until “they change their ways”. Should the Dollar remain on the defensive, Gold's rally may extend all the way towards the $1,237 level. Oil continued to post slight gains trading around $57 and the key challenge will be when prices hit the $58.50 area of resistance.
Equities were mixed on Friday with the US posting gains while the European markets were in the red pressured by the Brexit saga. The Asian markets have started the week in positive territory but the same cannot be said for the European and US futures. Investors were not happy to hear VP Pence's comments on China, which suggested that there's a long way before the two sides find some common ground so trading is expected to start with a bearish bias on both sides of the Atlantic.
MARKET EVENTS TO WATCH
- Euro-Zone Construction Output - 2pm
- NAHB Housing Market Index - 7pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research