We’ve seen risk aversion creep back into markets to welcome in Q2 and it would appear that geopolitical tensions are of concern once more. There was plenty of headlines over the weekend as Brexit negotiations focus on Gibraltar, but the UK PM is already using “war” in comments, while stateside President Trump is calling for action on North Korea, stating that “if China is not going to solve North Korea, we will”. There was also the attack in St Petersburgh, Russia which left 11 dead and many more injured which did not help the weaker tone. While war is an unlikely result of such actions and comments, it was certainly enough to give market reason enough for concern and selling in risk related assets dominated with European and US bourses trading lower. Safe havens like JPY and Gold were in demand through much of the afternoon and overnight.
We also have to take into account this is a very heavy week for data and several key speakers from central banks and to see the market taking some risk off the table is not surprising. The USD index traded higher through much of the day despite losing ground to JPY but eventually closed the day flat, while GBP was one of the worst performers as Brexit sentiment weighed on the pound, while a weaker manufacturing data print also didn’t help. Overnight markets traded lower, while this morning’s European open as also been lacking much drive.
The Euro has been one of the biggest decliners over the last week and the single currency did not get much love in yesterday’s session following comments from the ECB’s Praet. We pointed out the markets growing obsession with tapering in yesterday’s commentary but the ECB appear on the defensive and Praet suggested yesterday that policy makers are not yet looking to change direction in their policy stance. Add this to last weeks leaked report citing ECB concerns markets misinterpreted their “less dovish” meeting in March means we see this week’s ECB minutes (due Thursdays) and todays comments from Mario Draghi who speaks in Frankfurt at 1.00pm (GMT) , as carrying downside risk for the single currency.
The Euro was only outperformed GBP yesterday, but rallies have fallen short of .8600 which offers some resistance up to .8620. Fridays lows towards .8485 area are still a target for now but with buying interest below towards .8450, downside may be limited. EURUSD big range continues to be in focus between 1.0900 and 1.0500. 1.0732 offers some light resistance to the upside, but while we hold below there the lows towards 1.0500/1.0530 area attracts.
Factory orders and the final print of February’s durable goods orders will highlight the US session this afternoon however, what has been notable has been the rally in US treasuries which has led to yields dropping to almost their lowest levels of the year. The fact the USD has maintained strength is more likely down to weaker counterparts in Euro, GBP and even AUD and NZD as commodity currencies are feeling some strain with the RBA highlighting some softness emerging. Nonetheless the move lower in US yields in interesting, especially with so much key data and Fed members remaining quite hawkish on their rate outlook. We have one Fed speaker later in the evening but Trumps meeting in Florida with China’s Xi Jinping later in the week will also likely provide some volatility to markets over the week, and that’s not even factoring in the labour market data on Friday.
There is not much to say about GBP, the pound will find itself exposed to weaker data and Brexit related headlines. Data from the UK has been to the downside of late and while the pound holds firm for now, should we see a continued deterioration of data then downside may well extend for the pound. Especially as we await the EU’s guidelines for negotiations. GBPUSD looks like it wants to test the pre Article 50 release lows seen last week, 1.2377 marks that low with 1.2365 are highlight a 50% retracement of the recent rally, a break sub 1.2300 should target fresh lows towards 1.2100 once again.