Global Themes

Brexit deadlock leaves Sterling on edge
- Sterling’s recovery stalls, $1.25 calls
- Euro droops after dovish Draghi
- EUR/USD drifts within familiar range
- US data dump to drive dollar

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GBP

Sterling’s recovery stalls, $1.25 calls
UK Prime Minister Theresa May’s victory in a confidence vote on Wednesday supported Sterling from tumbling to lower year lows, but the currency is still fragile. The Brexit tumult remains unchanged, hampering any positive traction for the pound. Ms May travelled to Brussels yesterday hoping to win meaningful changes to her withdrawal agreement but European Union (EU) leaders confirmed the agreement is not open for renegotiation. PM May must win parliamentary approval for her Brexit deal or risks a chaotic no-deal scenario playing out, which is likely to send Sterling crashing.

The lack of any real progress is weighing on the pound. GBP/USD is facing stiff confrontation in the higher realms of $1.26 to $1.27, which appears to have flipped from a support to a resistance level. A fall back to $1.25 could commence today. GBP/EUR capitalised on the weaker Euro yesterday, stretching towards €1.12 before retracing nearer to €1.11 where it hovers this morning.

Although both the EU and UK want to avoid a disorderly hard Brexit scenario, this becomes more of a possibility as the March deadline approaches. Ms May might try and delay this exit date by requesting an extension to Article 50. Moreover, the possibility of a second referendum is also being rumoured, which is likely to boost Sterling higher. Uncertainty persists.

EUR

Euro droops after dovish Draghi
Friday morning kicks starts with a flurry of flash December PMI data from the Eurozone at 9:00am. Manufacturing, services and composite PMIs are all expected higher than November’s numbers, which could boost the Euro. The European Central Bank (ECB) confirmed the end of its bond-buying programme yesterday, though the Euro weakened across the board. It is nearly four years since it announced the historic stimulus measure to support the Eurozone economy. The move was expected despite the raft of weaker economic data in the Eurozone over the last few months and the increasing uncertainty of the global economic landscape. ECB staff projections did indicate a less than rosy outlook as growth and inflation forecasts were cut for 2019.

The ECB President Mario Draghi came across as ‘dovish’ in his press conference that followed the central bank’s policy announcement. Mr Draghi’s cautious message warned that risk, including geopolitics and global growth is tilted to the downside. The Euro quickly reversed course in a knee-jerk reaction to the downside, dragging EUR/USD back towards $1.13.

The weaker Euro allowed GBP/EUR to pull away from the €1.11 handle, as Sterling battles to avoid a third straight week of losses against the common currency.

EUR/USD drifts within familiar range
The ebb and flow of EUR/USD between $1.13 and $1.14 continues. The currency pair has closed each day out somewhere between these two levels for nearly three weeks now. Considering its trading range of well over 10% this year, the current lack of directional conviction may be a sign that a breakout is brewing.

On a daily basis, EUR/USD remains parked below some key simple moving averages, with the 50-day moving average at $1.14 its first hurdle to overcome. If the pair gains upside momentum above here, then a break towards $1.15, where the 100-day moving average resides, could proceed.

On the flip side, from a weekly perspective, the stronger 200-week moving average at $1.1311 has supported EUR/USD from a sustained downtrend for some time now. If the dollar picks up more demand, following the expected rate hike in the US, this could drag the pair beyond this key support level.



USD

US data dump to drive dollar
Across the pond awaits a busy afternoon of economic data releases with key US retail sales published at 1:30pm. Industrial production data drops in at 2:15pm followed by services and manufacturing PMI reports at 2:45pm. All the US data will likely be monitored closely as traders take positions ahead of the highly anticipated Federal Reserve (Fed) meeting next week. Despite the probability of a Fed hike falling in recent weeks, a fourth and final rate rise of the year is still widely expected, although most attention will be on forward rate guidance for next year.

Global risk sentiment looks to be recovering as US-China trade relations improve. There is a hint of cautious optimism that a deal will be agreed before March 01 next year. The US Dollar, classed as a safe haven currency, has oscillated with the conflicting sentiment and trade war headlines this year - as tensions rise, the dollar tends to appreciate and as they soften, the dollar tends to weaken.




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