The biggest story in the financial markets yesterday was the collapse of the Pound that fell almost 300 pips on the back of the UK Parliament's reaction to the Brexit draft. The resignation of key ministers within Theresa May's administration, namely Brexit Secretary Raab and others, sent shivers down investors' spines as the proposed agreement seems virtually impossible to be approved by the Commons. The Dollar was marginally lower even though retail sales data beat expectations, at least on the surface. Gold spent the day around the $1,215 and Oil recovered above $56.
The Pound saw its biggest one day decline since June 2017 yesterday as Theresa May brought the Brexit draft agreed with the European Union to the British Parliament. A series of ministerial resignations, headlined by Brexit minister Dominic Raab, revealed that May faces strong opposition from within her own party, let allow across the aisle. A leadership challenge from hard Brexiters may be imminent as the Pound traded to all the way to 1.27 before recovering to 1.28 overnight. Clearly this is not the end of the saga and with May battling to stay in power in order to deliver what she feels is “the best possible deal” Sterling will remain volatile. If she somehow musters enough support to get this draft through the Parliament then the Pound will rally towards 1.30 again while a complete rejection of the agreement, and possibly snap elections, may drive the currency to 1.25.
The Dollar shed initial gains to end the day on a bearish note after the release of the Retail Sales data from the US. The headline figure beat expectations printing at 0.8% but beneath the surface there was significant weakness on the control group component. This fresh piece of data, combined with the slightly bearish inflation figures on Wednesday and Jerome Powell's remarks on the US economy “facing headwinds”, is keeping the greenback on the defensive. Dollar/Yen traded all the way to 113.10 yesterday and, even though it recovered some of the losses overnight, a deeper correction would point towards the 112.50 mark.
The Euro is benefiting from Dollar's downbeat tone having traded to 1.1350 but the real reason why the currency is higher this week is the decline of the Pound. Concurrently, recent reports from the Eurozone have indicated fragile growth and investors begin to doubt whether the ECB is in a place to start raising rates after the summer of next year. Today, the focus will be on the release of the Eurozone inflation report which is expected to print lower than last month, further dampening the outlook for more Euro gains. Mario Draghi will be speaking earlier in the day as well so if we receive a cautious tone from the head of the ECB the Single currency may retreat towards 1.13 again.
Gold spent the day oscillating around the $1,215 level with limited volatility. Prices are again testing this key resistance and the outcome of this will dictate what's next for the yellow metal; a rejection of this level will send prices towards $1,200 again while a successful break to the upside will allow investors to target the $1,230 area. Oil is responding in a positive manner to the important $55 support level, trying to carve a bottom around this area, but we still need to be careful and see how the week ends for the black gold.
Equities were in the red in Europe yesterday but the US markets were able to close with strong gains. Investors were happy to see a strong US Retail Sales report that printed above expectations, at least on the surface as we indicated above, but this does little to change the broader agenda. Recent news from the US-China talks suggests that the two sides will likely agree on a framework for further negotiations at most; this would prolong that trade spat between them and equity futures are in the red this morning in response to the news.
MARKET EVENTS TO WATCH
- ECB President Draghi Speaks in Frankfurt - 12.30pm
- Euro-Zone Consumer Price Index - 2pm
All times are GMT +4.
Written by Konstantinos Anthis, Head of Research