FTSE -5 points at 7368 DAX +15 points at 12218 CAC +1 points at 5070 Euro Stoxx 50 -2 points at 3473
The GBP/USD shortly spiked down to 1.2376, as the UK officially triggered the Brexit on Wednesday. The UK’s tone was moderate and conciliator, yet the kneejerk backlash from the EU has been sharp. The EU pushed back the Britain’s proposal to discuss a free-trade environment, citing that the issue will be looked after at the advanced stages of the negotiations. Now, the major focus will be on the divorce itself and there is significantly diverging interests on the table. For the sake of prudence, the EU cannot facilitate the Brexit and take the risk of encouraging other members to replicate the British example.
Cable stabilized in the tight range of 1.2432/1.2451 in Asia, slightly above its 50-day moving average. As the critical psychological quake is behind, the bias in the pound remains positive for a third attempt toward the 200-day moving average, 1.2585. Support is eyed at 1.2415 (100-day moving average) and 1.2360 (50% retracement on two-week rally).
The EUR/GBP rallied to 0.8735 on the back of the Brexit-shake, yet retraced back to 0.8662/0.8623 in Asia.
Moving forward, the mid-term bias in the pound remains positive, given that the scenario of a hard Brexit has already been priced in and out by the markets. Concrete steps should help the markets readjust themselves as the news come in. For the time being, the wave of shock has certainly passed.
From a monetary policy perspective, based on rising inflationary pressures, low unemployment and decent growth, the Bank of England (BoE) could, in theory, raise the interest rates. Yet the BoE is expected to remain on hold to walk the UK through an eventually bumpy Brexit journey. Given the solid macro metrics, the only fact of maintaining the status quo is dovish enough. Therefore, the BoE expectations have a rising hawkish potential, which also gives a positive spin to the British pound across the global markets.
The FTSE 100 traded near its 200-day moving average (7360p) on the Brexit day. The early action on the FTSE rolling index hints at a softer open in London, mainly due to a stronger pound. Energy stocks could diverge positively as the WTI gains momentum to test $50 per barrel.
Except the pound, all G10 majors softened against the US dollar following hawkish comments from the Federal Reserve (Fed) presidents. Boston Fed President Eric Rosengren said he would opt for three additional rate hikes in 2017 to prevent an overheating in the economy, as Chicago Fed President Charles Evans assumed two additional rate hikes would be ‘safe’, three hikes could happen. The comments couldn’t prevent the U.S. 10-Year yields from slipping below the 2.40% level. The U.S. 2-10 year spread flattened the most since the US election, as the short-end of the curve was lifted at a higher speed than the long-end. This is because the rates were being pulled higher from very low levels and companies are not concerned by extra hiking for the moment. The flattening yield curve suggests a slowdown in the US dollar rally, and eventually a downside correction.
In the short-run, the US will release the 4Q final GDP data at 1.30pm GMT. Analysts revised their expectations slightly higher to 2% from 1.9% q/q annualized. Any positive surprise should revive the Fed hawks and boost the short-term US dollar purchases.
Asian stocks traded in the red. The Nikkei (-0.84%) and Topix (-0.94%) gave back gains, as the USD/JPY remained capped below 111.50. The quarter and fiscal year-end inflows into the yen should keep the USD/JPY capped before the end of March. Decent option barriers stand at 112.00 at today and tomorrow’s expiry.
The EUR/USD tested 1.0748 (major 38.2% retracement on March rise) on two consecutive trading sessions. Breaking the 1.0740 weekly support, the downside move could pick up extra momentum and extend to 1.0700 (50% retracement). There are mixed option expiries at this level. The 50-day moving average stands at 1.0670.