The FTSE plunged below 7300p at the London open, as fears surrounding a potentially too ‘hard’ Brexit rhetoric from UK Prime Minister Theresa May have taken their toll on the UK’s stock markets. The stronger pound has been an additional weight on the FTSE’s shoulders this morning.
Cable (+1.00%) started the day filling in Monday’s gap. The UK’s December inflation figures triggered an additional knee-jerk rally in the pound crosses. The GBP/USD traded at 1.2189 posterior to the solid inflation data, after having tanked to 1.1983 on Monday. The EUR/GBP fell to 0.87596.
The UK’s headline inflation accelerated by 1.6% on year to December compared to 1.4% expected and 1.2% printed a month earlier. The core CPI advanced to 1.6%, while analysts expected a steady 1.4% y/y. Output prices recorded a significant 2.7% rise (versus 2.9% expected) in December due to a cheaper pound.
Although the Christmas euphoria could explain a part of the increased inflation, the cheaper pound is the main culprit responsible for the up-trending inflation dynamics in the UK.
Signs of overheating inflation in the UK has revived the Bank of England (BoE) hawks and tempered the sell-off in the pound due to Brexit uncertainties.
Earlier this week, rumours were circulating about the possibility of an abrupt halt in the BoE’s asset purchases programme to prevent an exceeding rise in consumer prices. In fact, there is no particular need for such an abrupt action, as the BoE could consider tapering the monthly asset purchases instead of chopping them off completely and still achieve a similar result: slower pound depreciation.
Smoother policy action could even give the BoE a larger maneuver margin in the future. Therefore, the depreciation in the pound could continue, nevertheless slower than the current ‘panic-pace’. Meanwhile, the BoE will certainly keep clear from squeezing the already unstable sentiment in the UK’s financial space
PM Theresa May is due to speak later in the day and will unveil much expected details on her Brexit vision. The speech is expected to take place at around 11.45am GMT. According to extracts of the speech released by her office, May has no interest in a ‘half-in, half-out’ approach while exiting the European Union. The UK’s sovereign and the currency markets have been pricing in a ‘hard Brexit’ for the last week, therefore the surprise effect could be limited unless May brings up fresh, unpriced thoughts.
The key GBP/USD support stands at 1.1825 (October 7th flash crash low). Light option barriers trail down from 1.2085/1.2100 for today’s expiry. The recent rush in pound Put options hint that there may be further downside potential towards the 1.15 mark.
AUD/USD is testing a critical resistance
The Aussie rallied to a two-month high against the greenback, as iron ore prices traded at their highest levels in two years. Also, the easing US yields make the higher yielding currencies more attractive for carry traders.
The AUD/USD is testing a critical mid-term resistance at 0.7510 (major 61.8% retracement on Nov 7th to Dec 22nd decline), if surpassed, could encourage a further rise to 0.7630 (minor 76.4% retrace) before 0.7800 level.
Gold gains on lower US yields, softer US dollar
Gold has traded higher over 14 of the 16 last sessions. The precious metal extended gains to $1213 in Asia. Trend and momentum indicators are supportive of further upside correction. The key mid-term resistance stands at $1219 (major 38.2% retracement on Jul-Dec decline). Support is building above the $1200 level. Decent $1200 Call expiry is due tomorrow.
In the medium term, US inflation should be a key driver for gold prices. In fact, gold is one of the most popular hedges against inflation. If US inflation accelerates on prospects of solid fiscal expansion under Donald Trump’s rule, and if the Federal Reserve (Fed) fails to tighten the monetary policy at an according speed, the rising inflation expectations could generate a larger stream towards the yellow metal. This would in turn encourage its price higher to $1240 and even to $1270 (100 and 200-day moving averages respectively).
Randgold Resources (LON:RRS) Ltd (NASDAQ:GOLD) (+0.95%) and Fresnillo (LON:FRES) (+0.14%) gained on firmer gold.