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by Charalambos Pissouros

Oil Rallies on Libya Tensions, UK PM May Pushes for New Brexit Delay

The Norwegian Krone and the Canadian dollar were among the main gainers yesterday, aided by the rally in oil prices, which was fueled by supply-disruption concerns due to the escalating tensions in Libya. In Brexit-land, the UK Parliament approved legislation which gives lawmakers the power to proceed with changes over May’s new Brexit-delay request. Today, May will travel to Germany and France to meet with Chancellor Merkel and President Macron in order to discuss her request, before it is formally put on the table on Wednesday.

USD Retreats, Oil Rallies as Libyan Conflict Sparks Output Concerns

With not much on the economic agenda to drive the markets yesterday, the dollar traded lower against all but two of the other G10 currencies, erasing the modest gains it posted on Friday after the US jobs report, and trading even lower. The main gainers were NOK, AUD and CAD in that order, while the currencies that failed to capitalize against the greenback were the safe-havens CHF and JPY.

USD performance G10 currencies

Although the weakening of the safe-havens and the strengthening of the commodity-linked currencies suggests a risk-on trading environment, the performance in the equity market points to easing risk appetite. Perhaps investors preferred to take a cautious stance ahead of the emergency EU summit on Brexit and the ECB policy decision, both scheduled for tomorrow. Most major EU indices closed in negative territory, while in the US, the S&P and the Nasdaq posted modest gains, rising +0.10% and 0.19% respectively, but the Dow slid 0.32%, as its largest component, Boeing, fell around 5% after the company said it would cut production of its 737 MAX aircraft. During the Asian trading Tuesday, Nikkei was 0.19% up, but China’s Shanghai Composite closed 0.16% down.

Major Stock indices performance

The Norwegian Krone was the main gainer among the G10 currencies, while the Canadian dollar took the third place, both aided by the rally in oil prices. Both Brent and WTI entered a rally mode on Friday and continued drifting north on Monday, hitting fresh five-month highs. Brent traded above 70.00 dpb for the first time since November 12th, while WTI looks to be heading towards 65.00, a level last seen on November 1st. Canada is the 5th largest oil producer in the world, while Norway is western Europe’s biggest oil exporter and thus, their currencies are sensitive to movements in oil prices. Apart from the OPEC-led production cuts and the US sanctions against Iran and Venezuela, the latest rally in the oil uptrend was fueled by renewed fighting in Libya. Libya’s production has recovered slowly in recent months, reaching around 1.1mn barrels per day in March, but the escalation raised fears of production tightening and disruption of exports.

Brent Oil – Technical Outlook

Oil buyers have been having a really great time lately, dragging Brent oil higher, above the 70-dollar mark. For now, it seems that the commodity could continue pushing further north, at least in the short run. But before the “black gold” could make its way higher again, we may see a small correction to the downside before another leg of buying.

We notice that Brent oil found good resistance near the 71.10 barrier, which continues to hold the price for now. As mentioned above, we may see a small slide back down, potentially towards the 70.20 hurdle, but if the commodity fails to drop below it, then this could be a good opportunity for the bulls to jump in and lead Brent oil higher again. If this time the 71.10 area fails to withhold the price acceleration, then a break above it could open the door for a test of the 72.00 level, marked by the high of November 12th.

Alternatively, a price-drop below the 69.80 support zone, which previously acted as good resistance on April 3rd and 4th, might invite some bears again into the game. This could drag Brent oil to the 68.75 obstacle, which from Tuesday to Friday of last week held the commodity from dropping lower. If this time that obstacle won’t be able to deliver the same result, a break below it could push the price towards the 67.76 level, which marks the highs of February 22nd and March 26th.

Brent oil 4-hour chart technical analysis

UK PM May Travels to Germany and France Ahead of EU Summit

Moving to the UK, the pound and the Brexit sequel, the British currency was also lower against most of the other G10 currencies. It gained slightly only against USD, CHF and JPY. With the clock ticking towards Friday, the new Brexit day, the pound remained under selling interest, with investors probably sitting on the edge of their seats in anticipation of whether EU officials will grant (or not) another extension to Article 50 at an emergency summit dedicated on Brexit, scheduled to begin tomorrow.

GBP performance G10 currencies

On Friday, UK PM Theresa May decided to officially request another delay, up until June 30th, but yesterday, the UK Parliament approved legislation which forces ministers to consult lawmakers today, before the Prime Minister travels to Brussels for the summit. The bill, which passed through the House of Commons by a single vote, was yesterday approved with small changes by the Lords, and gives MPs the power to proceed with legally binding changes to May’s new delay request.

Today, May will also travel to Germany and France to meet with Chancellor Merkel and President Macron in order to discuss and push for approval to her request, before it is formally put on the table on Wednesday. Remember that EU officials insist that the UK has to present a viable plan on how it intends to move forward before they consider another delay, and bearing in mind that there is no material progress in talks between the government and the Labour Party (at least up until the time of writing), we see the case of PM May presenting a clear roadmap on Wednesday as a difficult task. Some EU officials may soften their stance tomorrow but taking into account that veto from just one member is enough to kill May’s request, we believe that the risk of a no-deal Brexit on Friday is still on the table, despite UK lawmakers’ attempts to avert such an outcome.

GBP/AUD – Technical Outlook

After GBP/AUD broke a few times below its medium-term upside support line taken from the low of December, the pair continues to trade below that line and seems to be aiming further down. But before we could start targeting lower areas, we would like to see a break below one of the key support zones.

As mentioned above, in order to aim for lower levels, GBP/AUD would have to fall below the 1.8275 hurdle, marked by the lowest point of March. The pair will then confirm a lower low and attract even more sellers, who might drive the pair further down to the 1.8200 obstacle, which held the rate from sliding on February 25th. We may see a small rebound from that area at first, but if the bulls are not able then to push GBP/AUD back above the 1.8275 barrier, this could be the cue for the bears to step in again and drive the rate back down. The pair might bypass the 1.8200 support zone and head towards the 1.8095 level, which is the low of February 21st.

On the upside, if GBP/AUD pushes above the 1.8355 barrier, this might increase the chances for the pair to travel higher, where the next obstacle may be the 1.8435 zone, marked by yesterday’s high. If that area is no match for the bulls, a further rate-acceleration could drag GBP/AUD to the next potential resistance zone, at 1.8540, which is the high of April 4th. That said, the rate would still be trading below the aforementioned upside line and thus, we would treat such a recovery as a corrective rebound, and not a move triggering a change in the near-term outlook.

GBP/AUD 4-hour chart technical analysis

As for the Rest Today’s Events

Apart from the discussion in the UK Parliament, and May’s talks with Merkel and Macron, the economic agenda appears very light. We only get the US JOLTs Job Openings for February, which are expected to have slowed modestly, and the API (American Petroleum Institute) weekly report on crude oil inventories, for which no forecast is ever available.

As for tonight, during the Asian morning Wednesday, Japan’s core machinery orders for February and the nation’s PPIs for March are due to be released, as well as Australia’s Westpac consumer sentiment index for April.

We also have two speakers during the Asian day tomorrow: Fed Vice Chair Richard Clarida and RBA Deputy Governor Guy Debelle.

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