UK inflation outperformed, GBP/USD broke above 1.25. Will GBP/USD stay above 1.25 after Article 50 is invoked?
UK CPI came in at 2.3%, outperformed forecast of 2.1%. The data supported MPC* member Kristen Forbes’ vote for a rate hike during their last meeting. GBP/USD celebrated and broke above 1.25, a 4-week high. UK is thin on data this week; the biggest driver for sterling will be the invoking of Article 50 on 29th March. Months after Brexit referendum, the day is finally approaching to kick-start the exit. The entire process is likely to take about 2 years to complete, before UK officially exits EU by early 2019. We expect an initial sell-off in the sterling after Article 50 is invoked, but the sell-off may wear off soon, as market focus back to the immediate possibility of rate hike by BOE**.
* Monetary Policy Committee ** Bank of England
Trump’s Troubles
US equities and the greenback experienced major sell-off last week. Dow Jones at 6-week low, EUR/USD at 16-week high and USD/JPY at 19-week low.
Trump’s trouble #1:
“I have been authorized by the Department of Justice to confirm that the FBI, as part of our counterintelligence mission, is investigating the Russian government’s efforts to interfere in the 2016 presidential election,” FBI Director James Comey said. Is this a political conspiracy? Regardless whether it is a “Yes” or “No”, the immediate reaction by the market is always “sell first think later”. When this news hit the wire, the first thing on people’s mind would be the possibility of impeachment. “Forget about the probability of it happening, let’s sell first.”
Trump’s trouble #2:
His healthcare bill has met with a setback. So what has healthcare policies got to do with the sell-off? The main concern of the investors is not the healthcare bill; they are concern about the future proposals of tax cuts and spending increase. If these future proposals are going to meet with the same resistance, then the growth catalysts anticipated could well become an illusion. US equities have enjoyed a good rally on the prospects of possible tax cuts and more spending, unless these hopes are renewed, US equities are likely to remain under pressure. Without the catalysts to boost growth, Fed may take an even less hawkish approach to their tightening plan. Given the present situation, we foresee the next rate hike to happen after first half of this year.
Our Picks
U30/USD (Dow Jones) – Slightly bearish. The downward momentum is strong. Consider going Short after price broke below the 50-day moving average.
USD/JPY – Slightly bearish. This pair broke 111 level and could be heading towards the next support around 109, unless hopes of tax cuts and spending are renewed.
XAU/USD (Gold) – Slightly bullish. Gold is on an uptrend thanks to the weakness in dollar. Consider buying at dips.
Top News This Week (GMT+8 time zone)
US: CB Consumer Confidence. Tuesday 28th March, 10pm.
We expect figures to come in at 113.2 (previous figure was 114.8%).
US: Final GDP q/q. Thursday 30th March, 8.30pm.
We expect figures to come in at 2.1% (previous figure was 1.9%).
Canada: GDP m/m. Friday 31st March, 8.30pm.
We expect figures to come in at 0.2% (previous figure was 0.3%).
Fullerton Markets Research Team
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