Yesterday was much about risk off, which came as no surprising considering the growing geo-political concerns, Facebook retaining information on millions of users without their consent, pressure mounting on Russia and of course Trumps tariffs and trade wars. With so much of this news (and more) to focus on over the weekend it was not a surprise.
It started in the Asian session late Sunday evening and continued right through all major indices in the European session and into the US as well, where major bourses closed the day all heavily in the red with losses in excess of 1% while the tech heavy NASDAQ closed down over 2% as Facebook declined almost 7% on data concerns.
The more positive news on the day however was that the UK and EU have agreed terms on the Brexit transition period which comes just ahead of next week’s EU summit. Needless to say, this positive news helped GBP which extended its rally against the USD and Euro, amongst many others. Not to be left out in the cold those little pests the “ECB sources” who were also active in yesterday’s session, every now and then word leaks out on the grapevine and while these “sources” are unknown, their words can be enough to shift the market dynamic. This was the case when the ECB sources suggested the voting members would be looking to shift their decision on the rate path trajectory and that even amongst ECB doves there’s some agreement that QE will be wound up this year. This all remains to be officially confirmed but that doesn’t stop the market reaction. Overnight sentiment remained sour and Asian bourses traded lower, although USDJPY traded higher on the night indicating we’re not seeing total risk aversion, that view was supported by a slightly stronger open in Europe this morning,
News of progress and agreement between the EU and UK on the Brexit transition was likely the best news we’ve seen closer to home. I’m always the skeptic when it comes to these type of announcements because we’ve been in similar positions on talks over the last 1.5 years and the real news has rarely been as good as the headlines. That being said sterling certainly wasn’t as skeptical as me and GBPUSD rallied as high as 1.408, support in the last 24 hours now sits at 1.4018/20 area and thus far in that time frame it has been used as a base to bounce higher. A break above yesterday’s high should see resistance at 1.4145/50 area. EURGBP just about covered its full range in the last few months and 12 successive days of selling has seen the pair drop from its highs just below .8970 back to yesterday’s lows at .8745. We’re a little bit higher than that point at the moment but looking to make our way back lower, a break below .8730 will but recent spike in lows towards .8680/90 area in focus but we have not stayed below those levels in a very long time.
UK CPI headlines this morning’s data calendar as the headline inflation figure is expected to decline to 2.8% from 3.0%. While falling inflation may be better for the economy and the BOE will see the rates drop back towards their 2% target, it also removes the argument for the BOE to raise rates any time soon. In this circumstance good news for the UK can mean bad news for GBP with the pound showing very little sign of concerns thus far this morning. Any CPI rate higher than expected will likely result in GBP rallying further and given the early head start in GBP trading firmer this morning, do not be surprised to see a higher CPI reading.
There’s not too much to catch out attention on the data calendar today, German ZEW data crosses the wires in the European session but will unlikely cause any seismic shift in the sentiment of the single currency so our ears will be peeled for more ECB words of wisdom, and any progress on geo-political escalations as well, as well as trade tariff and trade talks. There’s very little in the way of US Data today but dollar traders will only care about tomorrows FOMC meeting where rates are expected to rise 25bps.