It has been yet another dramatic 24 hours of swings both higher and lower for the British Pound as volatility continues in the lead-up to the fast-approaching March 29 deadline for the United Kingdom to leave the European Union.
The GBPUSD jumped over 2% late on Wednesday trade to touch its
highest level since June 2018 in the aftermath of MPs voting to take the enigma
of a no-deal Brexit away from the table. This is viewed as a positive move for
investors because it severely dilutes the risk of a disorderly exit from the
European Union, but I still do not expect investors to be able to take a
longer-term view on the British Pound strategy as it stands.
Rejecting the idea of leaving the European Union without a deal at
this point doesn’t change that much in the wider picture, considering that the
fact remains unchanged that the UK is still scheduled to leave the European
Union in 15 days from now.
Investors will now eagerly await another political event risk for
the Pound scheduled for later today, when MPs will participate in another vote
on whether to request an extension from the EU to delay the March 29 deadline.
Although it is widely expected that MPs will vote in favour of requesting an
extension to leave the EU, this doesn’t necessarily mean that the European
Union will play ball and provide the United Kingdom with the requested
breathing space. Essentially, and until it is confirmed that MPs will vote in
favour of an extension, which the European Union would then need to grant,
nobody is any the wiser of what exactly is going to happen with Brexit.
What investors do know is that MPs do not want a no-deal Brexit,
which of course eliminates a lot of wider risks to the UK economy and the
associated concerns of disruptive investor confidence but we don’t know much
else. Will the Brexit deadline be extended? Will the EU oblige to provide an
extension? For how long will this extension be? Is the probability increasing
that Brexit will not happen at all? Or will the eventual route be that
Parliament announces a second referendum?
Nobody knows what could happen or what is even possible with these
questions. This is of course a major problem for strategic investors who want
to plan for the future and they will understandably continue to change the
Pound views on a headline-to-headline basis. There is also a legacy aspect to
consider, where one wonders whether the reputational aspect of the United
Kingdom as a “safe” place to do business could change following all of the
recent political chaos that has taken place.
Overall, it has to be admitted that what happens next in the Pound
is a very difficult call to make. However, if I had to choose a position I
would side with the view that investors will “sell” the news in anticipation of
the vote later today, which is expected to result in an official plea to
request an extension to leave the European Union. I personally wouldn’t jump into the optimism
of pricing in a stronger British Pound until there is real conviction that the
European Union will accept the likely upcoming request to delay the March 29
deadline.
None of this is clear to be honest, but that’s Brexit in a
nutshell - unclear with little direction.
EURUSD unexpectedly
recovers post-ECB losses
In what has been another busy week for financial markets, one move
that has managed to stay under the radar is that the Euro has recovered all of
its losses since a very downbeat European Central Bank (ECB) President Mario
Draghi took to the stage just one week ago. The Euro sank to its weakest level
against the US Dollar since June 2017 after the ECB joined the party of
different world institutions, by reinforcing the view that external headwinds
are presenting many challenges to the global economy in 2019. The recovery in
the Euro has been supported by softness in the Greenback, although I do myself
maintain a negative view on the EURUSD.
The ECB has a very low amount of ammunition at its disposal to
improve EU economic momentum. The economy is clearly on a downturn as is
evident across a raft of different data releases, and the Eurozone economy is
very exposed to global headwinds. Much of the fate of the Euro is out of its
own hands; when you factor in that there is also an element of political risk
that remains within Europe itself, with the recent unrest in France being just
one example, I do myself maintain a negative view on the EU currency.
Rand fails to find
buyers in spite of Dollar Weakness
One currency that has unexpectedly not been able to benefit from
the current softness in the Dollar is the South African Rand. The Rand is
weaker against the Dollar, and the only reason that has been given for this is
the ongoing Brexit developments in the world headlines limiting global risk
appetite. However, I am not buying this explanation and would have expected the
Rand to strengthen against the Dollar in recent days, similarly to the trend
that has been seen in both the Euro and British Pound. While it is correct that
Brexit itself is a potentially serious external headwind staring down the
global economy, most of the political noise being heard from the United Kingdom
has been limited in financial movements to UK asset classes.
China data
announcements to threaten more global growth concerns
While it is expected for all major global headlines to continue to
focus on the latest Brexit updates, I would keep an eye out for a potential
risk-off atmosphere to impact financial markets today. Data announced early
morning from the world’s second largest economy, China, perpetuated the
narrative that GDP momentum is trending lower and this could fuel another round
of concerns over a slowdown in the global economy. This means we can expect the
momentum of emerging market currencies in south-east Asia to trend weaker, as
they are collectively closely correlated to a reliance on Chinese demand for
their goods, which should signify some softness in the likes of the Singapore
Dollar, Malaysian Ringgit, Indonesian Rupiah and even the Chinese Yuan after
the economic releases from mainland China.
Expect for Trump to
speak out again on Oil
To conclude in what by all accounts is likely to be another lively
day for investors, I would also keep a close eye on what happens next with Oil,
after the commodity stretched to a 2019 high on signs of tightening supply.
Stronger Oil prices is obviously good news for exporters, but it is not good
news for President Trump, who has made it clear on many occasions that he wants
Oil prices to remain low. Therefore, it will not be a surprise if Trump repeats
this narrative of demanding low Oil prices on his social media feeds
imminently.
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