Yesterday was a ‘risk on’ day. Sentiment recovered and all major bourses across the European and US session traded higher, the USD rallied and all was right with the world as it appeared that Trumps’ healthcare bid failure never happened. GBP faced selling into the close of the European session and that continued overnight, news that UK PM Theresa May had signed Article 50 and It was en-route to Brussels for delivery today saw profit taking in the recent GBP rally (especially against USD) but also saw sentiment weigh.
The USD was king however, with the USD index bouncing off lows and recovering over 1.2%. Much of the USD rally happened in the afternoon, several Fed speakers across the wires and the party line continues to point to 2/3 rate hikes in 2017. Overnight things were more or less flat, markets in Australasia trading either side of flat while the JPY was also relatively neutral. Markets no likely in consolidation ahead of the news flow from Article 50.
Markets are generally heavily short GBP, the pound still remains at long term low levels across almost all its major competitors and there continues to be expectations in markets of a Brexit fallout and some will tell you GBP is going to parity and beyond against the USD and EUR. We however, are not in that school of thought and we continue to see the pound heavily undervalued and weighed down by sentiment. Today will likely be a nonevent in many ways, there is no great market moving details expected to emerge, we have had over 8 months of lead time on this, we know where the UK government stand and what they want to achieve and we know what the EU want. This will not be resolved today and the pound may well find itself with a relief rally once the process is formally outlined which is expected to be at 12.20pm today.
The negotiations over the next few months will be the main area where GBP is exposed to shock downside but that’s also been the case for the last few months where headlines relating to Brexit cause more reaction than hard UK data. GBPUSD dropped from highs above 1.2600 to lows of 1.2378 this morning. Support now holds at those levels but with firmer levels below towards 1.2320/40 area. Topside, 1.2600 will be attractive for any relief rally but that would likely also require some USD weakness to re-emerge. EURGBP broke topside yesterday on GBP weakness, high towards .8730 area now offer resistance and GBP rallies will be looking to drive EURGBP back towards .8600/30 area where we last bounced.
Not much in the way of US data this evening, pending home sales data tops the bill but attention will more than likely be on the flurry of fed speakers due across wires and carious engagements. It’s been a full offensive this week from the Fed, and while we are not hearing the overly hawkish rhetoric we heard through much of March pre rate hike, they have been consistent pointing to 2 to 3 rate hikes this year. Should that continue to occur then we’ll likely see market get back on side and US yields will send the US higher once more. EURUSD failed to hold any break above that key resistance area around 1.0830, the rally towards 1.0900 quickly ran into sellers and overnight EURUSD dropped below 1.0800, 1.0770 area now provides some support.