The pound tumbled yesterday after Attorney General Geoffrey Cox said that the legal risks to the UK with regards to the Irish backstop remain unchanged, even after the legally binding assurances May secured on Monday. Hours later, the UK Parliament rejected the updated deal, opening the door to today’s vote on whether they should leave the EU without a deal on March 29th. If this option is rejected, then another vote on extending Article 50 will be held on Thursday.
The pound took a 180-degree spin yesterday and tumbled against all the other G10 currencies. The currencies that gained the most against sterling were CHF, CAD and EUR, while the one that managed to capitalize the least was AUD.
From the top to the bottom. From Monday’s big winner to Tuesday’s main loser, the pound remains anchored to headlines and developments surrounding the Brexit landscape. Yesterday, it was all about PM May’s updated deal with the EU and the “meaningful vote” in Parliament. That said, the pound tumbled nearly 200 pips against its US counterpart well ahead of the vote, after Attorney General Geoffrey Cox said that the legal risks to the UK with regards to the Irish backstop remain unchanged, even after the legally binding assurances May secured on Monday in Strasbourg.
The pound’s rally late Monday suggests that the changes in the deal may have sparked some hopes that the updated version could stand a chance. However, those hopes were slashed following the aforementioned remarks by the Attorney General. Indeed, lawmakers rejected the updated accord by 391 to 242, a smaller margin than in January, but still a big defeat just two weeks ahead of March 29th, the official Brexit date. The pound rose nearly 100 pips at the time of the vote outcome in a “buy the fact” response but was quick to give back those gains within the next hour.
Now, the focus turns to the second vote in line, which is over whether lawmakers would like to leave the EU with no deal on March 29th. Although hardline Brexiteers support that a no-deal exit may not harm the UK as many are afraid, most MPs would like to avoid such an outcome and thus, we expect them to reject the case of a disorderly divorce. We believe that they will vote in favor of extending Article 50 on Thursday. On February 26th, PM May said that the extension should be a one-off and as short as possible, suggesting that it could be up until the end of June. However, last night, she announced that the length of the delay the government will request from the EU will be decided by Parliament.
As we noted yesterday, voting in favor of an extension could still be a relief for GBP-traders, but we don’t expect the pound to skyrocket. After all, the currency already rallied in the second half of February due to hopes that a no-deal Brexit on March 29th can be eventually averted. Thus, we believe that a potential extension is mostly priced in and appears as the most likely outcome, in our view. Having said all that though, we stick to our guns that supporting an extension doesn’t mean that the chances of a no-deal Brexit have totally disappeared. First, consent from all 27 EU member-states is needed before a delay takes flesh. But even if it does, given that EU officials have clearly said this was Britain’s last chance, it will be very hard for May to put back on the table something that satisfies UK MPs.
After a strong, about a 370-pip, rise on the first day of the week, GBP/CHF sold off yesterday, losing around 70% of Monday’s gains. That said, the pair continues to trade above its short-term upside support line drawn from the low of January 3rd. Because the week is still seen to be an eventful one, from the UK news perspective, we will remain cautious and wait for a confirmation break though one of our key levels, before examining a further directional move.
If the rate moves strongly back above the 1.3245 barrier, this is when GBP/CHF could become attractive to the buyers again, as the break may increase the chances of seeing a further uprise. The pair might then travel to its next possible resistance zone, at 1.3330, marked by the high of February 27th. If that zone fails to hold the bulls down, the next target inline could be the 1.3395 barrier, which is near yesterday’s high.
In order to start examining the downside scenario, at least in short run, we would like to see a break of the aforementioned upside line and a drop below the 1.3055 hurdle, which is this week’s low. This way, the path further south could get cleared, as the move would confirm a forthcoming lower low. The rate might then re-visit the 1.3015 obstacle, which if broken could drag the pair much lower, bypassing the psychological 1.3000 zone and potentially reaching the 1.2950 level, which marks the low of February 18th.
The dollar traded lower or unchanged against most of the other G10 currencies yesterday. It gained notably against GBP, and slightly against AUD, which may have come under selling interest after the Westpac consumer sentiment index for March slid 4.8%, the most since September 2015. The greenback underperformed versus CHF, CAD, EUR and NOK in that order, while it traded virtually unchanged against JPY, NZD and SEK.
Yesterday, apart from developments surrounding the Brexit saga, we also had the US CPIs for February. Both the headline and core rates ticked down to +1.5% yoy and +2.1% yoy from +1.6% and 2.2% respectively, falling short of expectations for unchanged prints. Although underlying inflation remained fractionally above the Fed’s symmetric target of 2%, the headline rate was the lowest since September 2016, which may have prompted some market participants to add to their bets with regards to a Fed rate cut by year end. Indeed, according to the Fed funds futures, investors are nearly 80% confident that the Committee will refrain from acting this year, while there is a 20% chance for a cut. The probability for a hike remains at 0%.
We got inflation data for February from Sweden as well. The CPI rate held steady at +1.9% yoy, instead of rising to +2.0% as the forecast suggested, while the CPIF rate ticked down to +1.9% yoy from +2.0%. The forecast for the CPIF rate was to remain unchanged at +2.0%. Most importantly though, the core CPIF metric, which excludes the volatile items of energy, remained subdued at +1.4% yoy. Although it was found virtually unchanged against the dollar this morning, the Swedish currency slid at the time of the release, as the data may have raised some concerns with regards to the Riksbank’s plans to increase rates again during the second half of the year. The numbers also come just a week after the ECB pushed back its interest rate guidance, noting that rates are likely to stay at current levels “at least through the end of 2019.” Given that the world’s oldest central bank usually follows the footsteps of the ECB, investors may have started speculating a shift in Riksbank’s language as well.
However, given that GDP data showed that the Swedish economy expanded twice as fast as it was anticipated in Q4 2018, and bearing in mind last week’s remarks by Riksbank Deputy Governor Skingsley that the plan remains for higher interest rates later this year, we prefer to wait for a while more before we start examining whether this Bank will alter its hiking plans. Its upcoming gathering is scheduled for April 25th, and up until then, we have the March inflation data. Thus, we prefer to wait for these inflation numbers, as they may paint a better picture with regards to whether Swedish policymakers will stay willing to pull interest rates to zero (or not).
After hitting the 9.5000 barrier on Friday, USD/SEK moved lower, where it almost managed to reach its tentative short-term upside support line drawn from the low of January 11th. Even though we may see a re-test of that line again, as long as it remains intact, the pair could move up again. That said, our oscillators suggest that the short-term momentum is diminishing, which could result in the rate falling lower. But in order to consider that downside scenario, some of the criteria discussed below would have to be met first. For now, we will remain somewhat neutral and we will keep an eye on the price action.
As we mentioned above, the short-term up-moving line could provide some support for the upside scenario, but in order to get comfortable with higher areas, we would like to see a break above the 9.4100 barrier, which is yesterday’s high. This way more bulls could join in and drive USD/SEK towards the 9.4340 obstacle, a break of which could lead the rate to the above-mentioned Friday’s high at 9.5000 for a quick test.
Alternatively, if the pair slides below yesterday’s low and breaks the short-term upside line, this might spook the bulls from the field and allow the bears to dictate the rules, at least for a while. We will then look into the possibility of USD/SEK moving to the 9.2800 obstacle, which marks the low of March 6th. If that hurdle doesn’t hold, then a further slide could bring the rate closer to the 9.2450 support zone, which acted as a good support area on March 3rd, February 14th, 18th and 27th.
Besides the vote over a no-deal Brexit, UK Chancellor of the Exchequer Philip Hammond will present the “Sprint Statement” to Parliament. In the midst of all this uncertainty surrounding the UK’s departure from the EU, the Chancellor is unlikely to proceed with any major fiscal measures, and perhaps stick to commenting on the new forecasts form the Office of Budget Responsibility. In any case, we expect the Statement to pass largely unnoticed, as the center of attention will most likely be the series of votes with regards to what happens next with Brexit.
As for Wednesday’s data, we have Eurozone’s industrial production and the US durable goods orders, both for January. Eurozone’s industrial production is forecast to have rebounded 1.0% mom after sliding 0.9%, which would drive the yoy rate higher, but keep it into negative territory (-2.1% from -4.2%). As for the US durable goods orders, expectations are for a 0.5% mom slide after a 1.2% increase in January. The US PPIs for February are also on the agenda. The headline rate is expected to have ticked down to +1.9% yoy from +2.0%, while the core rate is forecast to have remained unchanged at +2.6% yoy.
With regards to the energy market, we get the EIA (Energy Information Administration) inventory data for the week ended on the 8th of March. Expectations are for a 1.9mn barrels slide following a decline of 2.4mn barrels the week before. That said, yesterday, the API report showed a 2.6mn decline and thus, we view the risks of the EIA data as skewed somewhat to the downside.
As for tonight, during the Asian morning Thursday, China’s industrial production, retail sales and fixed asset investment, all for January are coming out. Industrial production and retail sales are expected to have slowed to +5.5% yoy and +8.1% yoy, from +5.7% and +8.2% respectively, while the fixed asset investment rate is anticipated to have ticked up to +6.0% from 5.9%.
Apart from UK PM Theresa May, Chancellor Philip Hammond and UK lawmakers, we have three more speakers on the agenda: ECB Executive Board members Yves Mersch and Benoit Coeure, as well as ECB Supervisor Ignazio Angeloni.
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