FX market outlook

FX market outlook

Posted on Wednesday, April 3 2019 at 8:49 am GMT+0000

Pound climbs as May warms up to Corbyn; stocks jump

  • Encouraging trade signals lift risk sentiment; high-level talks resume today
  • Sterling climbs as May warms up to Corbyn to break deadlock
  • Dollar pulls back ahead of ADP report and ISM non-manufacturing PMI

Risk appetite boosted by hopes for trade breakthroughs

After a relatively uneventful session on Tuesday, during which major US stock indices such as the S&P 500 closed flat, risk sentiment was lifted overnight by some encouraging signs on the trade front. Reports suggest that top US and Chinese officials have ‘resolved most of the issues’ required to finalize a deal but are still far apart on the enforcement mechanism of any agreement.

In truth, this was nothing new, as US officials like Lighthizer made it clear long ago they want to preserve the right to unilaterally reimpose tariffs if they deem China is ‘violating’ the accord – something China has resisted ferociously. Regardless, the market saw this as yet another sign a deal is inching closer, with Asian stock indices being a sea of green today and futures tracking the US markets also pointing to a notably higher open. High-level talks will resume today in Washington, and should the relevant negotiators echo the optimistic sentiment that a deal is truly close, then risky assets could extend their latest gains.

Pound reverses higher as May warms up to Corbyn

In the UK, prime minister May announced that she will meet with the leader of the opposition Labour party – Jeremy Corbyn – for talks, in an attempt to break the Brexit deadlock. This bipartisan gesture of compromise, which is rather uncommon in British politics, fueled hopes that May is finally ready to soften her ‘red lines’ and accept a softer form of Brexit – for instance, one that includes a permanent customs union. Such a route would solve the Irish border issue and avoid the havoc of a no-deal outcome, but would also leave the UK unable to strike its own trade deals with other countries and infuriate hardliners in May’s party.

The pound, for its part, liked the news. It immediately soared on the announcement and is also performing well early on Wednesday, as this development raises further the odds that the UK will ask for a long extension at the special EU summit next week and diminishes the likelihood of a disorderly exit. The UK services PMI for March will be released today, though any headlines from the May-Corbyn meeting will most probably eclipse economic news in driving the pound.

Dollar pulls back as euro shows signs of life again

The world’s most traded currency pair – euro/dollar – is posting some gains early today, looking set to snap a six-day losing streak. The euro has been battered lately, as more signs have emerged that the Eurozone economy likely slowed further in the first quarter of the year, with the continued uncertainty in Brexit adding the ‘icing on the cake’. On the other side of the equation, the dollar has remained in high demand even despite the Fed’s dovish U-turn, mainly due to the US economy still being the ‘prettiest of an ugly bunch’.

Can this trend continue? The ‘real test’ for euro/dollar will likely be whether it can hold above the March lows around 1.1175. A decisive break below that area would signal that the broader downtrend is back in force, whereas a meaningful rebound may suggest the pair is in a range. As for what could trigger such a break, or rebound, important events are plentiful. The US ADP employment report for March and the ISM non-manufacturing PMI will both be released today, ahead of the official US jobs data on Friday and the ECB meeting next week.

Elsewhere, Bitcoin soared yesterday, touching a high of around $5000, without any clear catalyst or news behind the move.