Head of FX Strategy
Summary: Sterling surged higher as certainty that a no-deal scenario will be avoided rises sharply on UK Prime Minister May’s latest moves. Meanwhile, USD traders are struggling to find a pulse after Powell testimony failed to excite trading interest.
Powell’s semi-annual testimony before a Senate panel yesterday failed to inspire much interest, although the USD wakes up a hair weaker this morning than this time yesterday, perhaps in part on heavy GBPUSD flows inspired by sterling buying. Projections for the Fed policy rate dropped about a single basis point in the wake of Powell’s testimony and the Q&A as Powell has no real reason to send fresh signals other than “patience” now that markets and financial conditions have stabilised so thoroughly from the meltdown late last year. Equities ended the day slightly lower.
Sterling surged above resistance across the board on what appears a more decisive clearing away of no-deal Brexit risks, with the menu of options seemingly shrinking to either an approval of May’s deal (in a vote on March 12), another extension for further negotiation (on March 13), and even rising odds of a second referendum that would allow the UK to change its mind after opposition Labour leader Jeremy Corbyn voiced support for the referendum option if Labour’s preferred Brexit terms are not on offer (and they won’t be).
A useful Bloomberg article runs down the dates of the final weeks before the original Article 50 deadline of March 29. The FT’s Martin Wolf wrote yesterday (paywall ) that a second referendum is “now essential”. I had long thought that a second vote was not likely, but am now far less convinced. The chief difficulty is that no one really wants May’s deal – Brexiters would prefer a no-deal and Remainers want things to go back to the way they were.
Trading interest
GBP longs via GBPUSD and GBPCHF with stops below 1.3150 for both (trading at the same level because USDCHF at parity….) with a view 200+ pips higher.
USDCAD long idea struggling for air and risks a stopout. Fresh longs may consider stops a bit below 1.3100.
EURJPY shorts still in view with stops above 126.30, adding on a close below 125.50 and looking for a go at 124.00 support initially.
USDJPY looks a tactical shorts on upticks with stops well clear of 111.00 for a try below 110.00
Chart: GBPUSD
The latest developments make it clearer than ever that no-deal risks are fading fast and sterling has sprung to attention, clearing resistance levels virtually across the board. In GBPUSD, the clearing of the 1.3200 area could point to 1.3500 or higher – as sterling longs may be less reluctant to reprice sterling even if May’s deal heads for a vote failure in two weeks on the assumption that this could raise the prospects of a full Brexit reversal down the road via a second referendum.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
