Market Overview
After a delay of about a month, UK Prime Minister Theresa May will finally have the deal, that she brokered with the EU, put before the UK Parliament for a 'meaningful vote'. With traders bracing themselves, given the uncertainties of the vast array of permutations, it is likely to be a volatile day for sterling.
The vote could be as early as 19:00 GMT but with potential amendments to be ironed out, could mean that the actual vote is delayed by several minutes. This is a vote that she will almost certainly lose, and perhaps by some estimates (Sky News has a crushing defeat of over 200 votes) it could be a humiliating night for the Prime Minister.
There will be plenty of uncertainty yet to play out and tonight will not be the end of the matter (although it would be if she were to miraculously win). The question is therefore of the impact of the size of the defeat. A tight margin of defeat (less than 50 votes) would be considered workable and sterling positive. Perhaps with a tweak or two from the EU-27 then a vote could be won at a second attempt.
However, a crushing defeat of over 200 votes makes it far more difficult for Mrs May and the uncertainties grow wider and sterling would fall (possibly dramatically). However, the knee jerk reaction lower may not last as most paths now lead to a softer Brexit, or no Brexit at all. Labour would surely issue a vote of no confidence in the Government, but the Government would still most likely win. Then what next? Article 50 would surely have to be extended (sterling positive). Mrs May would have to go back to the EU to renegotiate for an even softer form of Brexit that may command a majority in Parliament. Failing that a second referendum which opens the possibility that no Brexit at all (again sterling positive).
There are two scenarios for sustained sterling weakness, the prospect of a no deal Brexit (far less likely now) and the Government losing a vote of confidence (difficult to see the DUP voting with Labour). That is for another day though. As for tonight, expect significant levels of volatility, and I am not necessarily going to trust the knee jerk reaction.
Wall Street closed lower with the S&P 500 -0.5% at 2982, but Wall Street futures are showing the market regaining yesterday’s losses today. This is helping Asian markets higher (Nikkei +1.0% and the Shanghai Composite +1.3%, whilst European markets are looking decent for the open too, with FTSE Futures and DAX futures both around three quarters of a percent higher.
In forex, there is a recovery in risk appetite showing with yen underperformance whilst the Aussie and Kiwi are stronger. Incredibly too, given the uncertainties ahead today, sterling is trading solidly higher too.
In commodities, gold is mixed to slightly lower, whilst there has been some support coming in for oil after a couple of negative sessions.
Aside from the UK Parliamentary “meaningful vote” on the UK Government’s Withdrawal Agreement deal (voting from 19:00 GMT), the economic calendar is somewhat US-centric today. However, there is the Eurozone Trade Balance at 10:00 GMT to consider with an expectation that it will expand further to the +€13.2bn (from +€12.5bn previously).
Over to the US, data kicks off at 13:30 GMT with the factory gate inflation for December and the US PPI which is expected to show headline PPI remaining at +2.5% (+2.5% in November), whilst core PPI is expected to pick up a shade to +2.9% (from +2.7%). The US Empire State Manufacturing (New York Fed) is at 13:30 GMT which is expected to improve marginally to +11.3 (from +10.9 in December).
Also keep an eye on the latest Fed speaker to air views with Esther George (voter in 2019, leans hawkish) at 18:00 GMT, now this will be interesting as coming from the more hawkish end of the scale, it could be telling if she took a dovish shift.
Chart of the Day – EUR/GBP
On a day where there is a huge, potentially game-changing, event (the UK Parliamentary vote on the Brexit deal), it may be difficult to take too much from the technicals, however, what are the key levels to look out for? There has been an interesting pivot at £0.8940 in recent months, which was broken on Friday on the suggestion that there could be a delay to the UK leaving the EU. This break was confirmed yesterday and continued buying early today effectively opens the way towards a move towards the next support at £0.8800. This comes with momentum increasingly corrective on EUR/GBP (sterling positive) to continue the drag lower. The Average True range on Euro/Sterling is currently 70 pips (or £0.0070) but Friday’s large range of 140 pips would suggest the day range today could be far bigger. The biggest range of the past 12 months was 195 pips on 15th November, the day that the UK Cabinet resignations began, so this seems to be a ballpark that is entirely possible today. Ultimately therefore, the key levels to watch on the deal would be on significant sterling weakness (on a large defeat for the Government) back towards £0.9100 (with initial resistance at £0.8940). A sterling positive outcome (tight loss or a Government victory) would be pulling the market below £0.8800 and towards the old key support around £0.8700.
The outlook on the euro has been more positive since the breakout above $1.1500 last week. Unwinding back into the trading band is not necessarily a bull failure, and as long as the market can sustain support above $1.1420 then the outlook will remain positive. Yesterday’s candle halted a run of two negative candles and has helped to form support at $1.1437 whilst also closing positively on the day. The momentum indicators are still encouragingly configured with the RSI above 50 and Stochastics above 60. The bulls will be watching the $1.1500 barrier once more as a breakout would help to re-engage the strong configuration which would take hold especially on a closing basis. A retest of $1.1570 can then be seen. The hourly chart shows that the strong position was relinquished on a move back below $1.1500 but this could be seen as another opportunity for the bulls whilst the support of the pivot at $1.1420 is held.
Given the importance and potential highly volatile session that is likely to be seen towards the end of today’s session, it is remarkable to see sterling traders taking a view in front of the key vote. It could easily be a case of buy the rumour, sell the fact. It is difficult to make the case for straight line sterling gains in this situation as the UK Government could be headed for an historic defeat which would be at least in the knee jerk reaction, sterling negative. Despite this, technical alone would be taking a different view as the breakout above $1.2800/$1.2815 which held well yesterday and continues to pull technicals higher into strong configuration is essentially calling for a move towards $1.3000 again. It is difficult to take a decisive view and we will know a lot more tomorrow (hopefully). Support at $1.2700/$1.2800.
We have been discussing in recent days the market forming a consolidation that would break the resistance of the falling four week downtrend. This had been threatening in recent days without ever really being confirmed, however this morning’s rally has certainly now ended the trend lower. This is now a trading range that has formed above the support band 107.75/108.00 but below the recent rally high of 109.10. It is interesting to see the momentum indicators, which have been fairly benign in recent weeks, starting to tick higher. The RSI is seemingly breaking higher, whilst the MACD lines are threatening a cross higher too. However, whilst the market is trading below 109.10, it is difficult to get too confident, as this consolidation could just be a pause in the selling phase. Despite this though, also, the near term outlook is less negatively positioned now as the support at 107.75 has been strengthened. So the next break of the consolidation range will be the key move.
Gold
The consolidation on gold continues as another mildly positive candle failed to hold the gains and the resistance of the recent high at $1298 builds further. There is still a positive configuration on momentum indicators, but the impetus is waning. The MACD lines are threatening to cross lower, whilst the Stochastics are also beginning to slide. It is difficult to see that this is negative condition yet though as the market is simply in wait and see mode and the momentum indicators are reflecting this (the bulls would be far more concerned if this waning momentum were coming in a rising market). The topside of the old five month uptrend channel is supportive at $1281 today and initial support is $1285. Key near term support is $1276, however, the strength of the medium term outlook leads to suggest that near term corrections remain a chance to buy.
WTI Oil
Near term corrections on oil are a chance to buy. We were discussing previously about the prospect of a drop back into the support band $49.40/$50.50 being seen as an opportunity and it was interesting to see yesterday’s low of $50.40 being where support has kicked in. This is helping to bolster the pivot band as support. Momentum indicators have been hit by the corrective move since Friday afternoon, but notably there is still a positive configuration with the RSI above 50 and Stochastics around 80. An uptrend from the low comes in at $48.10 today and whilst the support band around $49.40/$50.50 holds, this move is simply an unwind within the recovery.
The legs of the recovery seem to have been lost as the Dow again consolidates under the resistance of the old key lows at 24,000. In the past four sessions, the market has traded between 23,700 and 24,015. This does seem at the moment to be a pause for breath and there is little so far to suggest that there is a decisive shift in sentiment. Merely that the momentum indicators are tailing off in their improving configurations. Whilst the Dow is trading with support above the 23,345 long term pivot we could continue to see weakness as a chance to buy. This is reflected on the hourly chart which has positive configuration on hourly RSI and MACD lines that are unwinding back towards neutral. Holding above 23,703 maintains the positive outlook.
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