It was an interesting day in markets yesterday but the most interesting point came after the European close. GBP surged from 5.30pm on news that the UK and EU had agreed some terms in relation to the divorce settlement. An article in the Telegraph suggested the UK would pay the EU between 45-55 billion, while the FT later in the evening suggested the settlement and associated costs could run up to £100bln. Whatever the final figure, yesterday’s news amounts to some form of progress in meeting half way and opens the door to more detailed talks. It had been a rollercoaster day for GBP which had faced heavy selling for much of the day, GBPUSD was down over 1.25% at once point yesterday afternoon with lows towards 1.3221 trading. Sterling however surged on the news and cable is now trading up over 1.5% from yesterday lows.
It was a similar story across most GBP pairs, with the pound facing selling through much of the day only to surge higher through the day. In EURGBP we saw a break back above .8960 and as high as .8982 before the sudden reversal and lows this morning traded back below .8840. The short term future of GBP is heavily pinned on how Brexit talks go and for now sentiment has swung behind the pound. Needless to say the risk in coming days is if the UK government refute the divorce bill agreement, as can so often happen. But for now the larger ranges remain the focus for us in GBP pairs. GBPUSD remains 1.3020/30 up to 1.3360, while EURGBP continues to trade from .8730 up to .9000 area.
The USD also enjoyed some time in the sun yesterday as the new Fed Chairman was sworn in. Jerome Powell faced questioning from the Senate committee and the USD appeared to like what he said, the USD index rallying .4% on the day. While some of the shine in USD was taken by the surging GBP into the evening the greenback was firmer across the board elsewhere. EURUSD was down over .5% on the day, dropping back below 1.1900 with lows towards 1.1828, while USDJPY also pressed higher continuing its advance on the week.
Recent USD weakness has been on the back of some weaker US data and also the belief that next year’s rate hike expectations may not be as aggressive as markets had initially planned. However Powell’s stance appears to be slightly more hawkish than Yellen’s and while I’m sure the main focus will be on recovery in the economy and inflation, Powell will be weary of falling behind the curve. Let’s not forget that we are in a new norm for rates, we are not expecting a press back to interest rate levels of 4.5% and above, thus the longer end of the curve tends to suggest some flattening out. US GDP figures headline today’s calendar, while Yellen also speaks in front of congress. She’ll be removing herself from major duties now Powell has been sworn in and while she’ll no doubt assist in his transition in, her comments may already carry less weight. EURUSD back to 1.1860/80 area support/resistance zone.