Pound Starts To Falter, Even If We Have To Wait For Article 50

Parliament may have passed the Brexit Bill, but a source at the PM’s office said that Article 50 won’t be triggered today, instead we will have to wait until the end of March, when Dutch elections and the EU’s 60th birthday celebrations are out of the way. The pound has taken a sharp drop in early Tuesday trading, in fairness liquidity has been thin, however, it suggests that the reality of the UK’s divorce from Europe and two years of horse-trading to agree trade deals is beginning to spook the FX market.

FX/ equities inverse correlation back in fashion

The pound might be taking a knock on Tuesday morning, but the early equity futures market is predicting another positive open for the FTSE 100 on Tuesday, as Brexit and Indyref2 fears wash over stock investors. Even the FTSE 250, which is considered more sensitive to Brexit risks, ignored the impending triggering of Article 50 and reached a fresh record high on Monday. This suggests that the inverse correlation between the pound and stocks is back, although it could also be a sign that the concerns about Dutch elections and a Fed rate hike are receding, which is lowering equity market volatility and is also boosting European stocks this morning. Do watch out for strange moves on Tuesday, as liquidity could be thin throughout the day due to snowmageddon in NYC.

The dollar is the strongest performer in the G10 so far on Tuesday, the euro is the second best performer so far and the single currency is managing to stage a recovery after a weak performance on Monday. The recovery in the euro is most likely due to the strength in German bond yields, rather than anything to do with the Dutch election. The German 10-year bund yield has touched its highest level since early 2016 today, and is testing 0.5%, a key level of resistance. German yields are worth watching as they could determine the future direction of the euro in the medium-term.

Fed and the market in-synch ahead of March meeting

A recent Bloomberg survey found that the market is expecting more than three rate hikes from the Fed this year, which is what the Fed Fund Futures market is starting to price in ahead of Wednesday’s meeting. When the Fed and the market are in line this tends to supress market volatility, and the VIX Index, Wall Street’s fear gauge, has retreated in recent sessions, which could help equities push higher in the short term.

Does the March meeting matter for markets?

Maybe the market is getting complacent, or maybe it’s taking the view that the Dutch election is unlikely to hand victory to Geert Wilders on Wednesday, he is the far-right leader of the Dutch PVV party, which could ease fears about populism spreading to Europe. It also suggests that the market is happy, for now, with a faster pace of Fed rate hikes, although US stock markets have virtually ground to a halt. Thus, March’s Fed meeting, even if it does suggest that FOMC members want a faster pace of rate hikes, is looking unlikely to cause market panic, and instead we could see US stocks actually rise on Wednesday night, and the dollar and US yields retreat – market can be funny like that…

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