Yesterday was a day of two halves, the morning session started very much as Friday left off, with sellers in control and risk aversion the name of the game as markets begin to question Trump’s policies following the failure of his health act. Markets are also weary of major event risk for Europe and UK as Article 50 will be announced by UK PM May tomorrow.
Much of yesterday morning saw equities facing selling while the USD was also on the back foot. GBP however, was looking to press fresh highs while the Euro was also on a firm footing following a firmer IPO release from Germany adding to the run of strong Eurozone data. Come early afternoon things began to pick up, the USD staged a moderate recovery off the lows (after the USD index posted 4 month lows) while US stocks also improved helping lift sentiment into the European close. It was too late for European bourses to turn green at the close yesterday but they have opened firmer this morning, while the US managed to cover early losses to close the day higher. This sentiment continued overnight with Asian markets trading higher as the JPY traded almost .75% weaker against USD, a sign risk aversion is perhaps coming to an end.
There is little to watch out for in terms of major data for the European session, this morning focus will remain on broader sentiment, as well as any Brexit related news which could spur GBP and EUR pairs. The pound is showing no sign of jitters ahead of tomorrow’s Article 50 deadline, GBP continuing to ride on inflation expectations with GBPUSD up almost 4% from March lows, and while it is now in overbought territory technically, there appears some demand still, at least into month and quarter end. With that in mind we’ll be taking a cautious approach over the coming days. Month end flows can cause false breaks in recent trends/ranges and with the added event risk of Article 50, the next few days may provide increased volatility.
GBPUSD traded to 1.2615 yesterday before selling off on the broader USD rally 1.2554 and 1.2335/9 offer light support to the downside, while 1.2460 would need to give way for me to start looking back towards the lows. Once again, any break higher will run into sellers as we approach 1.2700. EURGBP has been battling back, looking to retest last week’s lows just above .8600 with .8550 the next area of support. Moves higher should be capped ahead of .8660.
Having a quick look at the Euro and we’ve begun to see some commentary from ECB members, suggesting that perhaps the time to begin discussing winding down accommodative policy is approaching. The press and market participants are keen to jump on any talk of tapering and while this will almost certainly become a discussion, the ECB still warn that data is overstating the health of the region. Until the ECB really ramp up their tapering rhetoric, the Euro’s strength will remain capped. EURUSD ran into sellers above 1.0900, 1.0945 to the 1.1000 area is my bull/bear line here. Since March 2015 this area has marked the EURUSD range, a break higher opens up the top range again towards 1.1600 area, yet we remain below lows just above 1.0300 attract.
There are some decent data points from the US today as well as several speakers, the pick of which will be Fed Chair Janet Yellen. There were plenty of Fed speakers across the wires yesterday and the general consensus still appears to be for 2/3 rate hikes in 2017. Continued support of this view should help USD higher, but we also need Consumer Confidence and Trade Balance figures to support rate hikes, and thus USD demand.