Daily Roundup – Markets review
Volatility jumped sharply yesterday in the wake of comments from central bankers and politicians, which most notably served to simultaneously bolster the Pound and sink the US Dollar. Fed Chief Jerome Powell reiterated the cautious tone over US monetary policy, acknowledging the risks that lay ahead, whilst a disappointing US home starts figure – a key forward looking indicator – also fell significantly short of expectations.
Simultaneously, Brexit developments saw Theresa May propose an option of delaying the UK’s departure from the EU past the March 29th deadline in a move that was seen as tantamount to taking the worst-case scenario no-deal option off the table altogether. This brought about a combination of economic sanity and dialled down the threat of a general election too, driving the Pound out to multi-month highs as a result. However it’s worth noting that two key risks remain here. Firstly, today’s vote in parliament could still see politicians taking control of the Brexit agenda. Yesterday’s concessions were designed to discount this possibility, but the market could still be surprised. Secondly, all European Union leaders need to agree to any delay and although this should be a formality given the fact no-deal would hit the Eurozone hard, even the smallest of nations could have a disproportionate effect here. Sterling may be heading higher, but bear traps still lie in wait.
Some disappointing Australian data overnight saw the Aussie dollar tip lower, whilst the lack of further detail over any trade resolutions between the US and China will also be dragging here. Based on the yield outlook, the AUD is still tipped to decline this year so any bursts of support could yet prove to be short lived.
USD/JPY is showing some weakness with the Yen picking up safe haven bids in the wake of escalating conflict between China and India. Optimism over the Trump/Kim summit that’s now underway is also serving to buoy support for the Yen. However that simultaneously creates two very clear geopolitical opportunities for reversion which should be very well telegraphed, and with comments overnight reinforcing the view that Japan will need to maintain lax monetary policy for some time yet, the drivers behind recent gains aren’t macroeconomic ones.
Downside pressures appear likely to prevail on USD/JPY with the pair now heading towards the 38.2% reversion of last year’s Q4 sell off. Look for support around 109.90.