Where do we start, oh yes of course, Brexit!
All I can really say is that after a series of votes last week the UK government finds itself back at square one.
Essentially PM Theresa May’s deal has already been rejected twice and a new deal Brexit also appears to have been taken off the table.
The move away from a no deal scenario significantly boosted the GBP, and if we continue to move in that direction that will almost certainly be the case.
In terms of what happens this week, who knows!
Update 19th March: Since writing this article on Sunday the speaker of the House of Commons has refused to let the government resubmit the proposal so now all bets are off. Nobody has a clue what is going to happen next!
On Sunday my bet was that be PM Theresa May’s deal coming back to Parliament and being passed with a small majority considering the DUP look likely to be paid to support the government and the right-wing ERG group of the Conservative party are becoming more concerned that if they keep saying there will be no Brexit.
This will be followed by a short article 50 to pass the necessary legislation. Watch this space……………………….. but stay away from GBP..
As a side issue, we know that Brexit dominates the GBP at the moment, but it’s worth considering recent releases from the UK, as they have been predominantly strong. We are seeing wages increase, GDP positive as well as manufacturing production, not to mention Philip Hammond in the recent spring statement saying he had £26 billion to play with courtesy of increased tax revenues. All in all is probably fair to say that the GBP is somewhat undervalued at the moment by Brexit, so once we get this mess out of the way I certainly bullish GBP.
The other big news from last week is the Fed continuing to maintain a dovish outlook, with Fed chair Powell stating last week that he was in no hurry to increase interest rates. In fact futures are heavily pricing in that there will be no increase this year. It’s FOMC week this week and I’m anticipating the Fed will keep interest rates unchanged and probably announce that the balance sheet normalisation will end this year. Both of these together are bearish USD, especially as we also saw no evidence of significant inflation both on the retail and production side.
In other news the Bank of Japan held interest rates at -0.1% and commented that exports are being affected by reducing global growth. However it was also commented that internal demand was strong and the economy continued to grow at a moderate pace. There was no indication that the current monetary policy approach was likely to change anytime soon.
What can we expect this week?
Quite a lot of news this week.
- Tuesday we have GBP average earnings, unemployment rate and at some point this week another possible Brexit vote.
- Wednesday the big event is the Fed interest rate decision and FOMC press conference. We also have UK inflation figures released which I think might beat expectation and New Zealand GDP.
- Thursday it’s time for Australia to get in on the act with their employment figures followed later in the day by the Bank of England interest rate decision and accompanying statement. Nobody is expecting a shift in rates but it will be interesting to see how much the Bank of England play up to the recent fairly good economic releases.
- Finally on Friday we have a number of Eurozone PMI releases including Germany and the composites, some of which tipped into contraction last month. We also have Canadian inflation figures later in the day.
Let’s first look at the dollar index. Once again we can see that it failed to break above the key level of 97.70 and I think that might be the last attempt we see for a little while. I’m expecting a dovish FOMC press conference this week which would put bearish pressure on the USD. Watch for it to break the trendline lower.
Risk assets look relatively balanced but remember we do have some black swans around, Brexit, Chinese trade deal with the US, continued riots in France and increasing tensions over oil between Iran and the US. We need to watch the news for any updates on any of these as sentiment could shift quickly.
Equities continue to grind higher with the S&P 500 reaching its highest level since November last year, and the FTSE 100 again attempting to break a key level of resistance. The Shanghai composites paused last week following a strong rally on the back of the Chinese government committing to stimulus, the Nikkei held steady also but watch for a direction if trading Japanese yen pairs. Remember they are negatively correlated.
What should we look at this week?
I’m actually not trading this week, couple of reasons, I’ve had the deadly man flu all weekend so I haven’t really done much research, and the worst thing you can do is enter the market unprepared. I also think there is a lot of potential for volatility this week with what I hope might be the end of the Brexit saga, FOMC, Bank of England and all of the European PMI’s. Sometimes the best way to trade is to not trade at all, remember the name of the game is to protect your capital, so every trade essentially is a risk. So this week I’ve decided to sit on the sidelines and let the dust settle from this week.
That’s all for now folks, happy trading.