Brexit remained on center stage, with UK MPs voting in favor of delaying the Brexit process. Nevertheless, sterling reacted little to the outcome, perhaps because it was widely anticipated. Now focus turns to a potential third “meaningful vote” on May’s deal, as well as the EU summit next week. Elsewhere, most equity markets traded in a risk-on mode, with Asian indices taking the steering wheel this morning, on optimism over the US-China trade negotiations.
The pound was found within a ±0.15% range against most of the other G10 currencies. The only currency against which it moved more was AUD, with GBP underperforming. The pound was lower against most of the others as well, gaining slightly only against JPY and EUR and trading virtually unchanged against USD and CAD.
Brexit remained in the spotlight yesterday, with UK Parliament members voting 412-202 in favor of an extension to Article 50. However, the pound reacted little to the vote. Following Wednesday’s surge on the rejection of a no-deal Brexit under any circumstances, GBP bulls may have preferred to lock gains instead of adding to their positions. After all, approving a delay was the expected outcome and as we noted in our previous reports, it may have been already priced in.
Now focus turns to a potential third “meaningful vote” on May’s deal, as well as an EU summit next week. Although UK MPs voted in favor of a Brexit extension, consent from all 27 EU member states is needed before such a delay takes flesh. The motion approved yesterday is setting out the option for asking a short delay if a Brexit deal is agreed by next Wednesday, or a longer one otherwise. Meanwhile, EU Council President Donald Tusk said that EU leaders may consider an extension of at least one year if the UK finds it necessary to rethink its strategy.
Therefore, the thread of a longer-extension, which could result in a softer deal or no Brexit at all, may prompt some hardliners to support May’s deal at a third “meaningful vote” next week. That said, marketwise, all these outcomes may be positive for the pound as they remove the risk of a disorderly withdrawal. For the currency to fall off the cliff, MPs would need to vote down again May’s deal and EU member-states would have to reject the extension request. Even if they decide to accept a delay, a “kicking the can further down the road” policy from the UK during the extended period will not be helpful for the currency either, as MPs will risk living what they want so much to avoid: a no-deal Brexit.
Yesterday was a relatively quiet day for GBP/JPY, comparing to the previous days of the week. Only at one point it seemed that the pair had a good chance of traveling further up, when it spiked higher, broke above Wednesday’s high, at 148.73, but then quickly got back down and for the remaining day, it just moved sideways. Overall, GBP/JPY is still trading above its upside support line taken from the low of January 15th. Even though the pair seems to be quite extended to the upside in the short run, as long as the rate continues to hold above the steep tentative upside line running from low of Monday, we will remain cautiously-bullish, at least for a while.
If GBP/JPY fails to get below the 147.35 hurdle, or even below the above-mentioned steep upside line, we will take this as an opportunity for the bulls to join in and lift the rate up again towards the 148.30 barrier. If that barrier is just seen as a temporary pit-stop, GBP/JPY might continue with its uprise to the next potential resistance zone, at 148.85, which marks the highest point of this week, for now. If that zone fails to withhold the rate down and it gets broken, the bulls might be more than happy to drive the pair to the 149.49 level, which marks the highest point of November.
Alternatively, a break below the above-mentioned steep upside line and a drop below the 146.65 hurdle may spook the bulls temporarily and allow the bears to take the steering wheel. The rate could then be forced to slide towards the support area between the 145.35 and 145.75 levels, which could initially hold the pair, but if the selling continues, then a further decline might be possible. This is when we will examine the possibility of seeing a re-test of the previously-mentioned short-term upside support line, which could break the fall.
The dollar was found virtually unchanged against the pound this morning, which means that it traded in a similar manner against the other G10s. It was slightly lower against most of them and gained only versus JPY and EUR. Apart from the pound, the greenback traded virtually unchanged against CAD as well.
Even though the Swiss franc strengthened somewhat yesterday, the weakening of the other safe havens, the US dollar and the Japanese yen, suggests that risk appetite may have been boosted again yesterday. Indeed, most major EU indices closed in the green, and although US indices traded lower or unchanged, the upbeat investor morale was revived during the Asian morning Friday. Japan’s Nikkei 225 and China’s Shanghai Composite both rose, 0.76% and 1.04% respectively.
The EU indices may have remained supported after UK MPs rejected a no-deal Brexit under any circumstances and perhaps due to expectations that they will vote in favor of extending the process, something they did. In the US, Dow Jones was virtually unchanged, but the S&P 500 and Nasdaq closed slightly down. Perhaps they were weighed on by comments from US Treasury Secretary Steven Mnuchin, who said that a meeting between US President Trump and his Chinese counterpart Xi Jinping is unlikely to take place at the end of March as more work is needed before sealing a final accord. That said, overnight reports that further progress has been made in trade negotiations may have restarted investors’ risk engines.
We also had a BoJ decision overnight. The Bank kept its ultra-lose policy unchanged via a 7-2 vote, maintaining short-term interest rates at -0.1% and the target of 10-year JGB yields around zero, with officials reiterating that they intend to maintain the current extremely low levels in interest rates for an extended period of time. That said, policymakers downgraded their economic assessment. They repeated that the Japanese economy is expanding moderately, but they added that exports and production have been affected by the slowdown in overseas economies.
The yen did not react much at the time of the release, but the Bank’s dovish tweak did not prevent market participants to keep selling it in the midst of a risk-on session. As we repeatedly pointed out in the past, with all Japanese inflation metrics below the BoJ’s 2% objective, we stick to our guns that policymakers are unlikely to alter their policy any time soon. Our view was confirmed by BoJ Governor Kuroda at the press conference after the meeting. The Governor said that overseas developments will affect Japan for some time, but the domestic economy continues to be robust, adding that it its appropriate to continue with the current policy. All this suggests that the yen is likely to stay more risk driven rather than monetary-policy driven. Due to its safe-haven status, investors may seek its shelter during periods of uncertainty and turbulence, while they may abandon it in favor of riskier assets, like equities, when there is a broader optimism and euphoria.
Last Friday, after a touch of the short-term upside support line drawn from the low of December 26th, Nikkei 225 rushed higher, but found strong resistance on its path near the 21550 barrier. This barrier held the index down throughout the whole week. On one hand we have an index which is forming higher lows, but on the other, it is struggling to push above its key resistance level for the whole week. For now, we will remain cautiously-positive and wait for Nikkei’s next big move.
In order to get comfortable with slightly higher areas, we would like to see a break above the 21550 hurdle, which could open the door to the 21645 obstacle, which is the intraday swing high of March 6th and the intraday swing low of March 4th. If that obstacle is not able to slow down the price-acceleration, then a push further up could drag Nikkei to the highest point of March so far, at 21860.
In terms of the downside, we will start examining a short-term correction if we see a drop below the 21275 support zone, which marks yesterday’s low. This could force the index to slide further towards the 21165 obstacle, bypassing its 200 EMA. If the selling continues and the price travels lower, the next target for the index could be the aforementioned upside line, which may provide some good support. Nikkei could also test the psychological 21000 level, which might also stop the price-depreciation.
During the European morning, Eurozone’s final CPIs for February are anticipated to confirm the preliminary forecasts of +1.5% yoy for the headline rate and +1.0% yoy for the core one, while later, in the US, industrial production is expected to have rebounded +0.4% mom in February after sliding 0.6% in January. The US JOLTs Job Openings for January and the preliminary UoM Consumer Sentiment index for March are also scheduled to be released.
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