The pound stayed under selling pressure during most of the day this morning, weighed on by uncertainty surrounding the Brexit delay. That said, the currency rebounded overnight, after EU leaders agreed to push back the Brexit date to April 12th. The Norwegian Krone was yesterday’s main winner, rallying after the Norges Bank hiked rates by 25bps and signaled that further increase is on the cards for this year.
The pound was found lower against all the other G10 currencies yesterday. The main gainer against the British currency was NOK, with EUR and CHF taking the second and third place respectively. The currencies which capitalized the least against sterling were AUD, CAD and SEK.
For another day, it was all about Brexit. The British currency stayed under selling interest during most of Thursday, weighed on by the uncertainty surrounding a Brexit delay. In our report yesterday, we noted that EU leaders were planning to offer a delay up until May 23rd in case of a positive vote on PM May’s deal in the UK Parliament next week, or until year end if that fails. We also noted that French Foreign Minister said that any extension could be turned down if May cannot offer guarantees over her deal passing in Parliament, something that kept the risk of a no-deal Brexit next week on the table. On top of that, DUP lawmaker Sammy Wilson noted yesterday that his party is nowhere close to backing the Brexit accord, something that may have added to the aforementioned risk, thereby adding more pressure to the pound. Comments from the French President Emmanuel Macron, that we are headed to a no-deal exit if UK lawmakers reject the agreement, did not help either.
That said, EU leaders reached consensus overnight in Brussels, offering an unconditional Brexit extension up until April 12th. If the UK MPs support the withdrawal agreement next week, then the date will be pushed to May 22nd, in order to finalize the exit. If the deal gets rejected, the UK will have to offer a new plan how to move forward or exit with no treaty. The pound rebounded on the decision, but the gains were not enough to recover the previously lost ground.
In our view, even if it is now confirmed that we are not headed towards a no-deal Brexit next week, the picture does not get any brighter. We believe that it is a “kicking the can down the road" decision, with the uncertainty still at elevated levels and the risk of exiting in a chaotic manner just pushed back by two weeks. The fact that the pound did not skyrocket at the time of the announcement shows that most market participants share the same view. With the DUP still not backing the withdrawal deal, we believe that the chances of it passing through Parliament next week remain very slim, and with PM May noting that Article 50 should not be revoked, we expect the pound to come under selling interest again, at least until we get concrete information that removes the risk of a disorderly divorce.
Apart from headlines surrounding the Brexit landscape, we also had a BoE policy decision yesterday. However, with the Bank’s hand tied due political uncertainty, it passed unnoticed. Just for the record, policymakers decided unanimously to leave interest rates unchanged at +0.75%, reiterating that an ongoing tightening at a gradual pace and to a limited extend would be appropriate. They also noted that their February projections appear on track, while according to the minutes, they maintained the view that whatever form Brexit takes, the policy response will not be automatic and could be in either direction.
After breaking on Wednesday its short-term upside support line taken from the low of January 3rd, GBP/CHF rushed further down to test the support area at 1.2910, marked near the lows of February 11th and January 22nd. The pair managed to rebound from there, but if it struggles to get back above the 1.3115 hurdle, then we will view the move higher just as a temporary correction before another leg of selling.
If GBP/CHF travels higher and breaks above the 1.3055 barrier, the bulls should not get too excited yet, as the above-mentioned resistance area, at 1.3115, might come into play. The level also coincides with the 200 EMA, which also may help to restrain the bulls from pushing further up. If this is the case, then the bears might see this as a good opportunity to step in and take back control. The rate could then slide back to the 1.3055 hurdle, this time testing it from above, but if it gets broken, then a further drop to the 1.3015 obstacle might be possible. If that hurdle is not able to stop the sellers from driving the pair lower, the next potential support zone could be around 1.2950, marked by an intraday swing low formed yesterday.
Alternatively, if GBP/CHF is able to travel back above the previously-discussed upside line and break the 1.3245 hurdle again, this could place the steering wheel back into the hands of the buyers, as such a move might increase the chances for the pair to travel higher. The next potential target for the rate might be the 1.3330 obstacle, a break of which could lift GBP/CHF to the 1.3420 level, marked near the highs of March 11th and 13th.
Apart from the BoE, we had to more G10 central banks deciding on interest rates yesterday: The Norges Bank and the SNB.
Kicking off with the Norges Bank, Norwegian policymakers decided to raise interest rates to +1.00% from 0.75% as was widely anticipated and noted that their current assessment suggests that the policy rate will most likely be increased again “in the course of the next half-year”. The statement accompanying the decision had a hawkish flavor, with officials noting that the Norwegian economy appears to be stronger than anticipated and that the policy rate forecast indicates a slightly faster rate rise in 2019, even though it is somewhat lower further out.
The Norwegian Krone surged at the time of the release, ending the day as the main winner among the G10 currencies. In our view, with Norges Bank staying in tightening mode at a time when other central banks, like the ECB and the Fed, are dismissing the idea of any hikes this year, the Krone is like to continue gaining, at least until data suggests otherwise.
Passing the ball to the SNB, its meeting was proven once again to be a non-event. Yes, the Swiss franc was among the main gainers, but it reacted very little to the meeting. After all, this Bank kept interest rates unchanged at -0.75%, with policymakers sticking to their guns that they will remain active in the foreign exchange market as necessary, and that the franc is still highly valued, even though it depreciated slightly on a trade-weighted basis. They also revised further down their inflation projections. They now expect the Swiss CPI rate to be at +1.5% yoy in Q4 2021, well below their 2% target, and this is conditional upon interest rates staying at current levels for the whole forecast horizon. Their previous forecast was for the rate to hit +1.9% yoy in Q3 2021.
EUR/NOK sold off yesterday after the Norges Bank interest rate decision. The pair managed to almost test the 9.5860 hurdle, marked by the low of November 15th, but rebounded and now sits above another key support zone, at 9.6070. We will monitor this area carefully, as EUR/NOK could continue traveling south, but with a small correction to the upside first. For now, we remain bearish at least for a short-while.
As mentioned above, the pair could retrace slightly back up to test the 9.6440 resistance area, which previously acted as strong support on January 31st. If the bulls find it difficult to drive the pair above that area, this might invite the bears into the game, who could enjoy a higher rate and lead EUR/NOK back down towards the 9.6070 obstacle. A break of that obstacle might clear the path to the above-mentioned 9.5860 level, or to a lower one, at 9.5665, marked by the highs of October 31st and November 6th.
On the upside, if EUR/NOK gets back above the 9.6540 hurdle, this is where the bears might start getting nervous about the near-term downside scenario. If the rate continues to accelerate and breaks above the 9.7020 barrier, marked near yesterday’s highs, that’s when full control of the pair could get into the hands of the bulls again and we may see EUR/NOK traveling further north. The next good resistance area could be at 9.7300, which is near the high of March 14th and coincides with the 200 EMA. A break of it may open the door for the rate to rise to the 9.7525 level, marked by the high of March 13th.
During the European session, we have the preliminary manufacturing and services PMIs for March from several European nations the Eurozone as a whole. Expectations are for the bloc’s manufacturing index to have risen, but to have stayed within contractionary territory, while the services print, although still above 50, is expected to have slid somewhat. The composite PMI is anticipated to have risen to 52.1 from 51.9. Even though this would mark the second rise of the index after six consecutive months of declines, we believe that it is too early to start examining whether bloc’s economic activity has turned the corner. Even the ECB itself continues to see downside risks to the economic outlook, according to Draghi’s introductory statement following the latest gathering, even after it pushed back its interest-guidance and announced a new round of TLTROs.
Later in the day, we get preliminary PMIs for March from the US as well. Both the manufacturing and services Markit indices are expected to have risen, to 54.0 and 56.6 from 53.0 and 56.0 respectively. That said, as we noted several times in the past, investors tend to pay more attention to the ISM indices, which are scheduled for April 1st and 3rd. The US existing home sales for February are also due to be released.
In Canada, we have the CPIs for February and the nation’s retail sales for January. The headline CPI rate is expected to have ticked up to +1.5% yoy from +1.4%, while no forecast is currently available for the core rate. As far as retail sales are concerned, both headline and core sales are expected to have rebounded after sliding in December. Although this is expected to be a decent set of data, we doubt that it could tempt BoC policymakers to switch again their view 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 turn confident again on more hikes in the months to come.
As for the speakers, we have three on the agenda: ECB Vice President Luis de Guindos, ECB Supervisory Board member Ignazio Angeloni, ECB Executive Board member Yves Mersch, and Atlanta Fed President Raphael Bostic.