Pound uncertainty continues with new Brexit deadline
Range bound trading likely through April 12, says Gaurav Kashyap
The British pound was range bound through March, trading between 1.2960 and 1.3380 on the month.
Despite a mixed data docket on the month, the pound’s weakness was underpinned by uncertainty following a treble of failed votes for Prime Minister Theresa May and her Tory party.
The UK was set to leave the EU last Friday and, a week on and two failed votes later, it seems there is no clear path forward. The most recent vote from this past Monday saw four different scenarios voted down - albeit by narrow margins. A permanent customs union with the EU was defeated by the narrowest of margins; 273 "yea" versus 276 "nay" while a second referendum also went down 280 versus 292.
Currently the EU has set April 12 as the no-deal Brexit day - the scenario in which the UK would leave in a "hard Brexit". While this scenario seems highly unlikely, Mrs May’s government may push for a further vote on her deal, which could yield to further extensions or even a possible U-turn and the calling for a second referendum.
Issuing a second referendum looks like the most secure option for the financial markets at this point. It would uphold the sanctity of the democratic process that would probably yield far different results the second time around. Regardless, the future remains unclear and the pound should continue to trade in this current range through the first half of April as we approach the second deadline at the end of next week.
The euro pared most of its gains on the month to close March flat against the US dollar. After hitting as high as 1.1447 in mid-March, the euro sold off to trade below 1.1250 levels against the greenback. The euro has been underpinned by a more dovish European Central Bank (ECB) - which last month pushed back on any future rate hikes to next year.
Previously, the central bank had left the door open to rate hikes as early as the summer of 2019, but deteriorating global sentiment has seen weakness in growth. I have been bearish in EURUSD and it will be interesting to see how the cross trades around the 1.1175 handle, the lowest level since June 2017.
Gold has been range bound through March - however the precious metal sold off rather aggressively in the last few days of the month. I am seeing strong buying support coming in between $1,274 and $1,280, which seems the safest option range for building long positions.
Following the coming out of a far more dovish US Federal Reserve, gold was not able to rally as much as many would have expected. Instead, after making a run towards $1,340 levels, buying support ran out of steam with the 100-day exponential moving average at $1,285.
Along with US non-farm payrolls due out this Friday (expected at $175,000 versus a previous reading of $20,000), we also await the press conference at next week’s ECB rate decision, which is largely expected to be unchanged on April 10. This is followed by a couple of key inflation prints — the US dollar on April 10 and the pound and euro inflation prints due out a week later on April 17. These data points will be key in determining future central bank policy and could see lively pricing action in their respective currencies especially if the print surprises.
Finally, US equity markets were largely unchanged through March. Following two strong upside moves in January and February it will be interesting if the Dow can approach those record highs that were reached back in October. Keep an eye out for an upside target 26950 for the Dow Jones Industrial Average, where I expect to see strong support kicking in.
Gaurav Kashyap is a market strategist at Equiti Global Markets. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti
Published: April 3, 2019 09:00 AM