The pound rallied overnight as UK Prime Minister Theresa May managed to secure legally binding assurances from the EU with regards to the Brexit accord. Today, the updated deal is likely to return to the UK Parliament for another “meaningful vote”, and if it is voted down, MPs will vote tomorrow on whether they want to leave the EU with or without a deal. If Parliament rejects the option of a disorderly withdrawal, a third vote over extending Article 50 will be held on Thursday. Apart from the UK vote on Brexit, we also get the US inflation data for February.
The pound traded higher against all the other G10 currencies on Monday. The main losers were CHF, JPY and USD in that order, while the currency that underperformed the least against the British currency was NOK.
The pound rallied overnight as UK Prime Minister Theresa May managed to secure legally binding assurances from the EU with regards to the Brexit accord, in a last-minute attempt to convince UK lawmakers to accept her deal. Following a meeting with European Commission President Jean-Claude Junker in Strasbourg, PM May said “Today we have secured legal changes”, adding that “Now is the time to come together to back this improved Brexit deal and to deliver on the instruction of the British people”.
Now, all lights turn to series of Brexit votes PM Theresa May promised to Parliament. Today, the updated deal is likely to return to the UK Parliament for another “meaningful vote”. If it is rejected another vote will take place tomorrow on whether Britain should leave the EU with or without a deal. If Parliament rejects the option of a disorderly withdrawal, a third vote over extending Article 50 will be held on Thursday. Despite the legally binding assurances, it is still not clear whether the amended deal can win majority in Parliament today. Conservative Brexiteers have accused the Prime Minister of surrendering to the EU, while Labour Party leader Jeremy Corbyn said that May’s negotiations have failed as the agreement does not contain the changes May promised to Parliament. He also urged Parliament to reject the deal.
In our view, all this suggests that the chances for the updated deal to pass through Parliament remain low. However, given the desire of most MPs to avoid a chaotic exit on March 29th, they may reject such an option tomorrow and vote in favor of delaying the divorce date on Thursday. Although such an outcome could still be a relief for GBP-traders, we don’t expect the pound to skyrocket. After all, the currency already rallied in the second half of February due to hopes that a no-deal Brexit on March 29th can be eventually averted. Thus, we believe that a potential extension is mostly priced in and appears as the most likely outcome, in our view. For the pound to surge, the approval of May’s alternative plan today may be needed.
If indeed lawmakers reject May’s plan but decide to request an extension, all eyes will quickly turn to the EU’s response as consent from all 27 member-states is needed before a delay takes flesh. But even if it does, we stick to our guns that the chances of a no-deal Brexit may not totally disappear. PM May said that an extension should be a one-off and as short as possible, suggesting that it could be up until the end of June. What’s more, EU Commission President Junker said that this was Britain’s last chance. “There will be no further interpretations of the interpretations; no further assurances of the re-assurances – if the meaningful vote tomorrow fails,” he added. Thus, even if we get an extension, it would be very hard for May to bring back home anything that satisfies UK lawmakers. The remaining alternatives may be a no-deal Brexit, a snap election, a second referendum, or revoking Article 50. With PM May dismissing the latter two, we prefer not to get overconfident that the worst is behind us.
The British pound strengthened against all its major counterparts yesterday, including the Japanese yen. GBP/JPY gained around 350 pips, rebounding nicely from its short-term upside support line drawn from the low of January 15th. Even though we may see a correction back down, as long as the rate remains above that upside line, we will target slightly higher areas.
A small throwback may re-test the 146.15 hurdle from above, which marks the low of February 27th. The area could provide good support, where the bulls could take advantage of the lower rate and jump in again in order to lift the pair higher. We will then aim for the 147.55 barrier, or even for the yesterday’s high at 147.80, a break of which could open the door to some higher levels. One of the areas that we will monitor will be the high of March 1st, at 148.57, which may slow down the rate acceleration temporarily.
Alternatively, if GBP/JPY continues to retrace lower and drops below the 145.75 hurdle, which is the low of March 7th, this might force the pair to continue with its path south, targeting the next potential obstacle on its way, at 145.10, marked by the intraday swing low of March 8th. If that obstacle is just seen as a temporary pit-stop for GBP/JPY, the rate may slide further, potentially re-visiting the aforementioned upside support line.
The dollar traded lower against most of the other G10 currencies yesterday. It gained somewhat only against CHF and JPY, while it traded virtually unchanged versus EUR and CAD. As we already noted, the currency that gained the most was GBP, with the second winner in line being NOK.
The Norwegian Krone jumped yesterday, after Norway’s inflation data showed that the headline CPI rate just ticked down to +3.0% yoy in February from +3.1%, instead of sliding to +2.8% yoy as the forecast suggested, while the core rate rose to +2.6% yoy from +2.1%. The forecast was for the core rate to have remained unchanged at 2.1%. At its previous meeting, the Norges Bank kept interest rates unchanged at +0.75%, reiterating that “the policy rate would most likely be raised in March 2019”. Thus, the aforementioned numbers may have encouraged NOK-traders to bet that a hike at next week’s meeting is a done deal.
Back to the greenback, today, its traders are likely to turn their attention to the US CPIs for February. The forecasts have changed and now suggest that both the headline and core CPI rates have remained unchanged at +1.6% yoy and +2.2% yoy respectively. That said, even with an unchanged core print, bearing in mind that the yoy change of WTI continued to improve during the month, although staying in negative territory, we see the risks surrounding the headline CPI as tilted somewhat to the upside.
Yesterday, retail sales for January came in better than expected, which, despite the downside revisions in the December prints, could have been the reason why market participants reduced their bets with regards to a Fed rate cut by year end. According to the Fed funds futures, the market is nearly 87% confident that the Committee will refrain from pushing the hiking button this year, while the probability for a rate cut has declined to 13% from 16%. The chance for a hike remains at 0%. Thus, a small rise in the headline CPI rate and a core print still slightly above the Fed’s symmetric target of 2% may allow investors to reduce further their cut bets, and perhaps revive some with regards to a hike.
After peaking at around the 8.8195 barrier on Friday, USD/NOK declined sharply yesterday, breaking below some of its key support areas. In our view, we may see a bit of correction back to the upside, but if the bear-pressure remains present, we may see another slide. That said, eventually the downside may be limited due to the short-term upside support line taken from the low of February 1st.
As mentioned above, there is a chance to see a move back to the upside, towards the 8.6930 hurdle, marked by the high of March 6th. If USD/NOK struggles to close above that area, this might be a good sign for the bears to step in again and drive the rate lower, potentially re-testing the 8.6445 support zone. If that zone fails to withhold the pair from pushing lower, a break below may lead the rate towards the 8.6250 obstacle, or even the 8.5930 hurdle, which is the high of March 1st. Also, a break of the 8.6445 hurdle might draw us a head-and-shoulders formation, which would support the downside idea, at least in the short run.
On the other hand, in order to examine higher areas again, we would like to wait until USD/NOK travels back above the 8.7285 barrier, marked by yesterday’s intraday swing low. This way, such a break might clear the path towards the 8.7525 and 8.7665 levels, where another break may allow the rate to accelerate further. This is when we will aim for the 8.7980 hurdle again, which is the high of March 7th.
Sweden’s inflation data for February are due out. No forecast is currently available for neither the headline CPI nor the CPIF rates. That said, we will once again focus on the core CPIF metric, which excludes energy. Since the previous Riksbank gathering, January inflation numbers disappointed, with the core CPIF rate ticking back down to +1.4% yoy from +1.5% in December. However, GDP data showed that the economy expanded twice as fast as was anticipated, while Riksbank’s Deputy Governor Cecilia Skingsley noted that the plan remains for higher interest rates later this year, even with inflation below the 2% objective.
So, having all that in mind, we believe that a rebound in the core CPIF rate may increase speculation for a Riksbank hike in 2019, but another slide may raise concerns on that front. Yes, Skingsely said that a hike could come even if inflation is below 2%, but an underlying rate of +1.3%, or lower, will be far from warranting such a move in our view. In any case, the Bank’s upcoming gathering is scheduled for the 25th of April, and up until then, we also have the March inflation data. Thus, we prefer to wait for that data set before we start examining what signals we may get from the world’s oldest central bank.
From the UK, we have industrial and manufacturing production for January, as well as the monthly GDP for January. Both the industrial and manufacturing production rates are expected to have rebounded, to +0.1% mom and +0.2% mom from -0.5% and -0.7% respectively. This would drive the yoy IP rate lower, to -1.3% yoy from -0.9%, but the manufacturing yoy rate is anticipated to have ticked up to -2.0% from -2.1%. That said, bearing in mind that the manufacturing PMI for the month slid to 52.6 from 54.2, we view the risks surrounding the manufacturing production rate as tilted to the downside. With regards to the monthly GDP, no forecast is currently available for the monthly rate, but the 3-month rolling quarterly one is anticipated to have declined to +0.2% from +0.4%. The UK trade balance is also due to be released and the forecast is for the nation’s deficit to have widened fractionally. Having said all that though, we don’t expect this data set to attract any significant attention as investor will keep their gaze locked on the Parliamentary vote over Brexit.
With regards to the energy market, we have the API (American Petroleum Institute) weekly report on crude oil inventories, but as it is always the case, no forecast is available.
As for the speakers, we have two on today’s agenda: ECB Executive Board member Sabine Lautenschläger and Fed Board Governor Lael Brainard.
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