Markets Turn ‘Risk On’, UK MPs Vote on Half the Brexit Package

9 min readMar 29, 2019

The dollar was the best performer among the G10s, despite the downside revision in US economic growth for Q4. Broader sentiment was boosted as well, perhaps aided by the modest recovery in Treasury yields, as well as headlines surrounding the US-China trade talks. The pound was yesterday’s loser staying pressured in the aftermath of MPs’ unsuccessful attempt to break the Brexit impasse. As for today, lawmakers will vote over May’s Withdrawal Agreement, but not the Political Declaration.

USD The Main Winner, Market Sentiment Recovers

The dollar traded higher against all the other G10 currencies on Thursday. The main loser was GBP, with JPY and NZD taking the second and third place respectively. The currencies against which the greenback gained the least were CHF, NOK, AUD and SEK.

The greenback was yesterday’s best performer, despite the downside revision in US Q4 GDP to 2.2% qoq SAAR from +2.6%. Perhaps the currency remained under buying interest as Treasury yields stabilized again, with the 10-year rate bouncing 0.42% yesterday. During the Asian morning Friday, it added another 0.50%. It seems that the US dollar was the currency of choice because investors may have been more worried about the state of other major economies, like the Eurozone. Indeed, the US/German 10-year yield spread was 0.16% up yesterday and rallied another 0.72% during the Asian morning today, with the greenback gaining 0.21% against the common currency.

The modest recovery in yields may have helped the broader investor mood as well, which may have also been boosted by headlines surrounding the new round of US-China trade talks. Even though major EU indices closed unchanged or lower, with the exception being UK’s FTSE 100 (it may have gained due to the tumble in the pound), US bourses closed in the green, with the positive sentiment rolling into the Asian session. Japan’s Nikkei 225 and China’s Shanghai Composite were 0.82% and 3.20% up respectively.

Speaking about the trade talks, Chinese Premier Li Keqiang said that his nation is willing to expand market access in its financial sector, while US Tr. Secretary Steven Mnuchin said today that he had a “productive working” dinner last night. These headlines come on top of reports noting that China has made proposals on issues including technology transfer and add to the positive atmosphere surrounding the negotiations. Remember that there is also a plan for a Chinese delegation led by Vice Premier Liu He to visit the US next week, for further discussions.

As for our view, it remains the same as yesterday. More headlines suggesting progress in the talks could support further risk appetite. Equities could gain more, while safe-haven assets are likely to stay under selling interest. However, we doubt that this round of talks has the potential to offset fears with regards to a global economic downturn. Unless economic data globally starts to show some stabilization, we would treat any trade-related recovery in equities, and other risk-linked assets, as a corrective move.

DAX 30 — Technical Outlook

Since December 27th, DAX 30 has had a great run to the upside, trading above its medium-term upside support line taken from the low of that day. But on Friday last week, the German index broke through it and drifted south. After hitting support near the 11265 area, the index rebounded and got back up, but it still remains below that upside line. For now, we could see the price rising a bit more, at least to test that upside line from underneath. But if that line continues to hold DAX 30 down, this would be the cue for the sellers to step in again. For now, we remain somewhat bearish, at least for a short while.

If we look at our DAX 30 cash index on the 4-hour chart, a push above the 11505 barrier could lead the index towards the aforementioned upside line to test it from underneath. If DAX struggles to travel above it, then we may see the sellers stepping in again and driving the German index back down. This is when we will target the support area below the 11505 hurdle, at 11370, marked by the Wednesday’s low. A further slide south could re-test the 11265 level, which marks this week’s low.

On the other hand, if DAX 30 breaks the previously-mentioned upside support line and shifts above the 11625 barrier, this could invite more buyers into the game, resulting in the price accelerating further. The next resistance target for the index could be around the 11725 obstacle, a break of which might push DAX 30 to its March high, at around 11823.

UK Parliament Votes on Withdrawal Agreement

The pound was yesterday’s main loser as it continued to slide following the unsuccessful attempt of British lawmakers to break the Brexit deadlock. It lost the most against USD, CHF, NOK and AUD in that order, while the currency that capitalized the least against GBP was JPY.

Today, UK Lawmakers will hold a special sitting, where they are expected to debate and perhaps vote over the PM May’s legal Withdrawal Agreement, but not the whole exit package, which also includes a Political Declaration over a long-term EU-UK relationship. With the exit package as a whole being rejected twice up until now, the government may be hopping that a split would increase the chances of a Parliamentary victory, something that could potentially push back the exit date from April 12thto May 22nd. That said, approving only the Withdrawal Agreement is not enough for the whole exit package to be ratified into law. For this to happen, parliamentary approval for the Political Declaration would also be needed, which may require another vote at a later stage.

As for our view, we still see the chances of a positive outcome as low. Despite PM May’s offer to resign if MPs approve her deal, several hardliners within the Conservative Party, as well as Norther Ireland’s DUP stay in the rival camp. Thus, a rejection today will bring us back to square one, but a day closer to April 12th, the new exit day. The pound could stay pressured in case May loses again, but with all the outcomes still on the table, from a no-deal Brexit to no Brexit at all, we prefer to avoid drawing any conclusions with regards to the currency’s next trending path. For now, we still expect it to stay headline driven, with anything suggesting that a disorderly withdrawal is becoming less likely having the potential to provide support, and vice versa.

EUR/GBP — Technical Outlook

After hitting strong support near the 0.8490 area on Wednesday, EUR/GBP rebounded and pushed back to Monday’s high, at 0.8595. At one point yesterday, the pair travelled slightly above that high, but at the time of this analysis is back slightly below it. There is a chance we could see a small retracement back down, but if such a move will be short-lived, the bulls could pick up on that and lift the rate. That said, let’s not forget that the current political instability in the UK around Brexit could affect the pair as well, which might ruin the whole technical picture. Nevertheless, we remain cautiously-bullish for now.

A small shift lower in EUR/GBP could drag the rate towards the 0.8560 area for a quick test. It is marked by yesterday’s intraday swing high, which could hold the pair from falling lower. If that’s the case, the bulls could try to jump back behind the steering wheel and push EUR/GBP to the upside again, initially aiming again for the 0.8595 hurdle, or even for the yesterday’s high, at 0.8610. If both of these are seen as temporary obstacles on the bulls’ way, a further rate-acceleration could lead EUR/GBP to the 0.8640 barrier, a break of which might open the door to pair’s next potential resistance zone, at 0.8690, marked by the intraday swing high of March 21st.

Alternatively, a drop below the 0.8560 hurdle could raise concerns over the short-term upside idea discussed above. If the rate starts sliding below the 0.8525 zone, marked by yesterday’s low, this is where more bears could start joining in. Such a move may open the door to the 0.8490 obstacle, a break of which could drive the pair to its next key support area, at 0.8470. That zone held EUR/GBP twice from falling, on March 11th and 13th.

As for the Rest of Today’s Events

During the European morning, the 2nd estimate of the UK GDP for Q4 is coming out and is expected to confirm its initial estimate, which showed that the economy slowed to +0.2% qoq from +0.6% in Q3, with December marking a month of contraction. That said, we already got data on how the economy entered 2019. The January GDP prints showed a rebound in monthly terms, with the 3-month rolling rate ticking up to +0.5% from +0.4%. Thus, we expect this release to pass unnoticed, especially in the midst of all this uncertainty surrounding Brexit.

In the US, personal income for February and personal spending for January are due to be released, alongside the core PCE index for January. Expectations are for income to have rebounded +0.3% mom in February from -0.1% in January, which is supported by acceleration in average earnings for the month. Spending for January is also expected to have rebounded, to +0.3% mom from -0.5%, supported by the rebound in January’s retail sales. As for the core PCE index, the Fed’s favorite inflation measure, it is anticipated to have remained unchanged at +1.9% yoy. New home sales for February and the final UoM consumer sentiment index for March are also scheduled to come out.

From Canada, we have the monthly GDP rate for January, and it is expected to have risen to +0.1% mom from -0.1%. Coming on top of the upside surprise in inflation data for February, a positive monthly GDP rate following two negative ones would be pleasant news for BoC policymakers. However, we doubt that it could tempt them to switch again their stance on monetary policy. At the latest meeting, they turned dovish, altering their view for more rate increases over time and noting that “the outlook continues to warrant a policy interest rate that is below its neutral range”. They also highlighted the uncertainty surrounding the timing their future actions. Thus, we believe that they would like to see more improvement in economic data before they get confident on further rate increases again.

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