Market Overview
Brexit negotiations have reached a peak this week. UK Prime Minister May’s trip to Strasbourg late yesterday has seemingly been fruitful as she has declared that the EU has yielded in making concessions on her Withdrawal Agreement. The extent of these details are as yet unknown, and it will be interesting to see if this is a game changer. Mrs May suffered a crushing defeat in Parliament at the first attempt, but now she will try to get this deal voted through again today, hoping for a better result the second time around.
The main sticking points preventing her deal getting through have been on two areas of the Irish Backstop. Firstly to convince her own harder form Brexiteer MPs, the problem has been that the UK can unilaterally leave the backstop (i.e. not tied in forever), and if this can be overcome, then it could persuade them to vote for the deal. Also, her “confidence and supply” partners, the DUP, need to be swayed as they require Northern Ireland to be treated the same as the rest of Great Britain (i.e. not having a border down the Irish Sea). If these changes have been secured then Mrs May might, just might, get her deal across the line today (or at least very close).
Sterling has reacted strongly to this news of concessions being granted, but just how far do the concessions go and are they enough. It will be a crucial day in Parliament today as Mrs May puts her arguments across. Expectations management of Brexit has been horrific from day 1 and the Government has had plenty of form in overpromising and under delivering. However, a dramatic improvement on the 230 vote defeat of the first attempt and sterling will continue to strengthen.
The vote is likely to be around 19:00 GMT tonight. Away from the UK, there has been a broad rebound in risk appetite, as equity markets have put the brakes on their recent correction to close strongly higher on Wall Street last night. With major bond yields on the rise and volatility falling, suddenly the glass is half full again.
Despite the big negative drag of Boeing (NYSE:BA) shares falling 5%, Wall Street closed a hugely positive session with decisive gains. The S&P 500 closed +1.5% higher at 2783 whilst US futures are a further +0.2% today. Asian markets have also taken up the challenge with the Nikkei +1.8% and Shanghai Composite +1.0%. Gains are also being seen in Europe, but it is interesting to see the negative correlation drag of a sharp sterling rally is having on FTSE Futures which are just +0.1% whilst the DAX futures are +0.6%.
In forex, the big story is the rebound on sterling being +0.4% on Cable (although this was well over 1% higher earlier). Risk appetite being positive means that the yen is an underperformer along with the dollar, whilst the Kiwi is performing well.
In commodities, the better risk environment and weaker dollar is allowing silver to perform well, whilst oil is continuing to build on yesterday’s gains.
The UK monthly GDP is at 09:30 GMT and is expected to show GDP improved by +0.2% in January. UK Industrial Production also at 09:30 GMT is expected to have improved by +0.2% on the month in January (-0.5% in December), but the year on year data would then be deteriorating to -1.3% (-0.9% in December). US CPI inflation for February is at 12:30 GMT and is expected to show both headline CPI staying at +1.6% (+1.6% in January) and core CPI expected to stay at +2.2% (+2.2% in January).
Chart of the Day – EUR/GBP
It is unlikely that the technicals will be in the forefront of traders’ minds today as the UK Parliament begins what could be three days of votes on Brexit, the outcome of which could significantly impact the outcome of Brexit and subsequently how sterling is valued. The reaction seems to still be one to buy sterling into weakness (as EUR/GBP is dragged lower). Technically this is certainly the case with the recent decisive breakdown below £0.8615 in February setting the market up for further downside (as the market prepares for the likelihood that a “no deal” Brexit is being ruled out). There has been a downtrend formed of lower highs and lower lows in the past two months. Yesterday’s failed EUR/GBP rally at £0.8675, subsequent close below £0.8615 and intraday move below £0.8527 takes Euro/Sterling to its lowest since May 2017 and re-opens the way towards £0.8300/£0.8300. The politics is still uncertain, but the prospects of a no deal Brexit are falling, which is driving sterling strength. Momentum indicators are reflective of selling into strength and the RSI showing renewed downside potential. A move towards £0.8300/£0.8400 is now on. There is a resistance band of key overhead supply between £0.8615/£0.8690.
The bulls will be encouraged that the snap rebound from Friday back into the $1.1215/$1.1300 band has not been automatically met by a wall of selling pressure. However, there is much more that needs to be done for this rebound to be considered a meaningful recovery. Monday’s small bodied consolidation shows the market edging higher, a move which is continuing today. However, the amount of overhead supply under $1.1300 means that this is a big barrier to get through now. There is a technical improvement, given the tick higher on the Stochastics (a positive signal), but the medium term configuration on MACD and RSI remains negative and reflects the struggle that the bulls are up against for a sustainable move higher. The hourly chart shows a move higher on near term improving momentum, but it is a cautious move. Initial resistance at $1.1275 but $1.1300 is a big resistance area. Support is building at $1.1220 now as a higher low above $1.1175.
Sterling is likely to be a wild ride throughout this week and the move since Monday have not disappointed. Last week’s consistent decline is a distant memory already as Cable has rebounded off $1.2947, bouncing over 200 pips into the close to leave a massive bullish engulfing candlestick. The run has continued early this morning to leave resistance at $1.3288 and turn back lower again. This ride of volatility is unlikely to end there with these big votes in Parliament in the coming days. Trading on technicals will be difficult (newsflow on Brexit is the far greater driver of sterling for now), but a Stochastics cross buy signal has been posted. There is a positive bias now and it seems that sterling is pushing to test the highs again. This means the resistance $1.3300/$1.3350 could come under pressure now. There is intraday support between $1.3100/$1.3185 now.
The support is starting to form on Dollar/Yen as the corrective drift of the past week has begun to dissipate. A doji candle yesterday included a very slight higher daily low and it is interesting that intraday moves below 111.00 (which has previously been a pivot area) have been seen as a chance to buy. This support is also forming around the rising 21 day moving average which has also been supportive throughout the past six weeks. Momentum remains medium term positively configured despite the recent near term unwind, and this is still likely to be a buying opportunity. The hourly chart shows that the corrective drift is improving on momentum once more, with a more neutral (if not positive) configuration forming on hourly RSI and MACD. A move above 111.20 is supportive whilst the bulls will be looking to test above 111.60 to regain the initiative. Support at 111.75 is growing in importance now as a potential higher low.
Gold
Once more we see the importance of the long term pivot band $1300/$1310 which has come in as a basis of resistance. Yesterday’s negative candle has left resistance at $1300.60 and there is concern that the rebound move on Friday could be a bull failure. Having broken the four month uptrend, the market is now at risk of forming a new trend lower as a two and a half week downtrend has developed. How the momentum indicators react here will be key, as the RSI confirmed the breakdown and a failure to recover back above 50 will be a concern for the bulls. There is key support at $1276 which held last week with the lows around $1280, and this basis of support is now crucial to prevent what could be the formation of a large “head and shoulders” top pattern. Despite this though, it was interesting to see the near term pivot (shown well on the hourly chart) around $1290 coming in as a basis of support overnight. The price action outside of this mini $10 range $1290/$1300 could be key for near to medium term direction now.
WTI Oil
The oil price rally of the early weeks of 2019 has lost its impetus recently, but that does not necessarily mean that the bears are in control. Breaking the uptrend and forming a mini trading range between $54.50/$57.90 over the past three weeks has come with the rally failing under the $58.00 medium term pivot. However, given the recovery off Friday’s low and positive candle formation yesterday, the bulls will have eyes on a retest of the range highs again and the $58.00 pivot once more. There is still an appetite to buy into weakness and the positive medium term configurations on the RSI and MACD lines reflect a positive bias despite the consolidation. A move above initial resistance at $57.00 improves the outlook in the range again, but until there is a closing breakout of the range, direction is difficult to see with conviction.
Following Friday’s intraday rally into the close, there were suggestions that the bulls were ready for a fightback again. Yesterday’s solid bullish engulfing candlestick session shows this fightback is now on. A decisive run higher into the close has completely flipped the corrective move on its head. Suddenly the bulls have won the past two sessions and are testing the pivot around the 76.4% Fibonacci retracement at 25,715 again. The uptick on daily RSI back above 50 is encouraging and the Stochastics are also bottoming. The improvement in momentum is shown on the hourly Stochastics which are the strongest for two weeks. Support is now strong at 25,210 whilst there is a near term breakout support now at 25,555/25,610. Intraday weakness is now a chance to buy. A close above the 76.4% Fib at 25,715 will test the pivot at 25,870.
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