European Open Preview – Pound soars on Brexit deal, eyes PM May’s cabinet meeting and inflation data


Marios Hadjikyriacos, XM Investment Research Desk

Here are the latest developments in global markets:

  • FOREX: The dollar index is lower by 0.2% on Wednesday, extending its losses from the previous session, which came mostly due to a recovery in the pound and euro. Sterling in particular soared after the EU and UK were reported to have reached a Brexit deal. Elsewhere, the loonie touched a fresh four-month low versus the dollar amid collapsing oil prices.
  • STOCKS: The Dow Jones (-0.40%) and the S&P 500 (-0.15%) closed slightly lower on Tuesday, as optimism that the US and China would restart trade talks was eclipsed by losses in energy stocks, amid a massive selloff in crude prices. The Nasdaq Composite was flat. Asia was mixed on Wednesday, with Japan’s Nikkei 225 (+0.16%) and Topix (+0.17%) closing with modest gains, but the Hang Seng in Hong Kong drifting lower (-0.54%). In Europe, futures tracking the major indices are pointing to a lower open today despite the breakthrough in the Brexit talks, with losses being led by the energy sector.
  • COMMODITIES: Oil collapsed on Tuesday, with WTI falling by a little over 7% to settle near $55.50 per barrel, and Brent diving by around 6.5% to stabilize near $65.30 a barrel. The losses came amid growing concerns for excess supply coupled with uncertainties around demand, as OPEC revised down its forecasts for global demand growth yesterday. The cartel also said non-OPEC supply growth is set to rise faster than world demand growth. That said, considering the magnitude of the plunge, and the fact that these forecasts make OPEC more likely to take action to support prices, one wonders whether the recent rout may have gone too far. In precious metals, gold is flat at $1,200 per ounce today, trading sideways despite the pullback in the dollar.

Major movers: Pound soars on Brexit deal, but real battle to be fought in Parliament

EU and UK negotiators reached a draft Brexit deal on Tuesday, which reportedly guarantees there will be no physical checks, i.e. a “hard border”, between Northern Ireland and the Republic of Ireland. The details of the accord have not been made public yet, and UK PM Theresa May is scheduled to present them to her Cabinet today at 1400 GMT for approval. Assuming the senior ministers sign on, then the agreement will be put before the UK Parliament for a vote. The pound liked the news, advancing across the board as speculators likely unwound or covered several of their prior bearish bets on the currency.

One shouldn’t get carried away with optimism though, as reports suggest the UK Cabinet is highly skeptical of the deal. Even if it gets the Cabinet’s endorsement, the key issue will be whether it can pass Parliament, as several lawmakers already said they will most likely vote against it. The opposition Labour party, the DUP, and Brexiteers including the likes of Boris Johnson made it clear they are unlikely to vote in favor. Hence, the “real battle” will probably be fought in the House of Commons, and given how unhappy most lawmakers already seem without even having read the details of the deal, it wouldn’t be a surprise to see sentiment around the pound sour again before long.

The euro rose in sympathy to sterling on the Brexit breakthrough, paying little heed to the fact the Italian government resubmitted its budget to the EU without changing its controversial deficit targets. Hence, an EU-Italy clash appears all but imminent, with the real question being whether the Commission will go as far as impose the fines that the rules call for, or whether it will seek a third option to defuse the situation and avoid fueling anti-EU sentiment in Italy.

Elsewhere, risk appetite was on wobbly legs, with US equity indices swinging between gains and losses, to close slightly lower. On the one hand, news the US and China are set to restart trade talks supported sentiment, but massive losses in energy stocks and whispers of forthcoming US tariffs on European autos likely kept a lid on optimism.

Day ahead: US & UK on receiving end of CPI data; revised Q3 GDP due out of eurozone; Brexit, Italy in focus

Wednesday’s calendar features inflation data out of the US and the UK, as well as updated growth estimates out of the eurozone. Brexit news, as well as any headlines relating to Italy’s budget plans, will also be closely watched.

UK inflation data for October will be made public at 0930 GMT. October’s consumer price index (CPI) is expected to grow by 2.5% annually, which would reflect a slight pickup compared to September’s 2.4%. A beat in the numbers, in conjunction with more positive momentum on Brexit, could see sterling posting sizeable gains as investors will start pricing in a more aggressive tightening cycle by the Bank of England.

On the Brexit front, Britain and the EU may have agreed on a preliminary exit deal, but still there’s room to run as PM May needs to pass this from parliament, something which is not considered an easy task. May will be meeting with her cabinet at 1400 GMT to discuss the draft withdrawal agreement. Any headlines are likely to prove pound-sensitive.

Elsewhere, the nation will also be on the receiving end of data on retail prices (RPI) and factory prices (PPI) at the same time as CPI numbers hit the markets.

Fresh estimates of Q3 GDP growth out of the eurozone will be hitting the markets at 1000 GMT. No revision to the preliminary readings which disappointed is anticipated, with yearly expansion expected to be confirmed at 1.7%, its weakest since Q1 2017. Industrial production prints are due at the same time out of the bloc, with a monthly contraction in output being forecasted.

Brexit – sterling and the euro are highly positively correlated as of late – and Italian developments seem to have much more capacity to move the euro during today’s trading, rather than any economic releases.

Out of the US, CPI figures for October are due at 1330 GMT. These do not pertain to the Fed’s preferred inflation gauge, that being the core PCE index, though they still have their significance; stronger numbers can stoke speculation for an even more hawkish Fed.

US CPI is predicted to have rebounded after easing in September, rising by 2.5% y/y in October. Core CPI that excludes volatile food and energy items will also be eyed. That’s expected to remain constant at September’s annual pace of growth of 2.2%.

Of note, Fed Chairman Jerome Powell will be discussing national and global economic issues with Dallas Fed President Robert Kaplan (non-voter in 2018) at an event hosted by the Dallas Fed. Specifically, Powell will be participating in a Q&A session at 2300 GMT. Meanwhile, Fed policymaker Quarles (permanent voter) will be testifying before the House Financial Services Committee (1500 GMT), while the BoE’s Ramsden is also on the agenda.

After yesterday’s sharp selloff, oil traders will also be keeping an eye on weekly API data on US crude stocks due at 2130 GMT.

Technical Analysis: EURGBP bearish bias in place, trades near 6½-month low

EURGBP is trading less than 50 pips above Tuesday’s six-and-a-half-month low of 0.8655. The Tenkan- and Kijun-sen lines are negatively aligned, attesting to the negative short-term bias that is in place. Notice though that the Kijun-sen is moving sideways at the moment which might signal weakening negative momentum.

A UK inflation beat, or more importantly rising optimism for an orderly Brexit, are likely to push the pair down. Support to losses may come around yesterday’s low of 0.8655, with steeper losses eyeing 0.8620, the pair’s lowest since May 2017. Further below and given a violation of the 0.86 mark, the 0.85 handle would increasingly come within scope.

On the upside and given relatively weak UK numbers or Brexit complications, resistance could occur around the Tenkan-sen at 0.8727; the zone around this captures numerous bottoms from previous months. Higher still, the focus would turn to the region around the Kijun-sen at 0.8797 and then to the 50-day moving average line at 0.8832.

Italian politics – the EU-Italy budget standoff – can also move the pair.