The pound was the big story yesterday as it rallied over 1% following comments from the EU’s Barnier. “(we) are prepared to offer a partnership with Britain such as has never been seen before with any third country”. The step back from the brink saw many GBP short positions covered but we are a long way from seeing a turnaround in the outlook for GBP and while Barnier’s comments may mean the worst case scenario is currently being priced out, it still does not mean we are getting anything close to a soft Brexit.
Plenty of UK headlines were calling the comments a”climb down from the EU” – this is far from the case. The EU have not stepped back and have never been the ones blocking Brexit progress, in fact they have remained very resolute on their position. The UK government is still struggling to agree internally what Brexit means and while PM May has taken some more control, Barnier’s comments are still suggesting a no deal Brexit scenario and while the EU want to have a close relationship with the UK, it will not be “a la carte”. Meaning the single market is the single market and if there is no agreement on the finer points we may still see a no deal Brexit. EURGBP dropped from highs on Tuesday evening just below .9100 to lows this morning just above .8970. GBPUSD rallied from just below 1.2850 yesterday to highs just short of 1.3050 this morning, we currently just hold above 1.3000 for now but the road ahead for GBP remains rocky.
Elsewhere there was plenty of attention stateside with ongoing negotiations around NAFTA or NAFT 2.0 as it is being touted, the agreement in principal with Mexico has spurred on Canada and talks are ongoing, but positive, with a focus on a Friday deadline. US stocks have once again pressed to all-time highs and that sentiment has been echoed overnight with the Nikkei also briefly touching fresh highs overnight but European stocks are all in the red thus far this morning. The USD has struggled to grab any kind of foothold over the last two weeks, in fact the USD index has traded lower in 10 of the last 12 trading days, we’ve opened today slightly more positive but as always beware of presidential comments on dollar strength, it may be unpredictable in exact timing but Trump is almost certain to bring it up again.
Yesterday’s GDP figure for the US was better than expected at 4.2% vs 4% estimated and looking at broader markets, the USD’s weakness this week’s looks like a more favourable rotation into riskier assets, with EM markets benefitting. One exception being Turkey where a downgrade to Turkish banks and a continued volatile TRY still have them on the high risk radar.
German unemployment this morning has come in as expected at 5.2%, the CPI inflation figure is set for release at 1pm GMT and due to remain unchanged at 2% year on year, larger attention will be on the Eurozone release tomorrow but Germany may set the tone into tomorrow. EURUSD still looking towards 1.1730/50 range for strong resistance to any moves higher, while 1.1640 is holding downside for now. Firmer support back towards 1.1520 attracts below there.