As expected, the Brexit Withdraw Bill was voted down this week.
What wasn’t expected was that the Bill will now be remembered as the most lopsided “No” vote in the UK Parliament in over 100 years.
The sheer magnitude of this Brexit setback made it easy for the opposition to table another No Confidence vote in the chamber, which PM May survived by a mere 19 votes.
An interesting fallout from those two votes is that opposition leader, Jeremy Corbyn, has demanded that Ms May rule out a Brexit with “no-agreement” as a pretext to her next round of discussions with the EC. We see this as an impossible request without undermining what’s left of the UK’s negotiating leverage in Brussels.
Based on these developments, one would think that Forex traders would have pounded the Sterling lower, but that’s not what’s happened.
Since the beginning of the week the Sterling has gained over 3.0% versus the Euro, 1.3% against the Aussie Dollar and just over 1% versus the USD.
It appears that the market is now considering the EU’s willingness to grant an extension of the Article 50 exit deadline from March 29th into the second half of 2019 as a net-positive for the Sterling.
Against the backdrop of the “yellow vest” chaos in France, a simmering banking crisis in Italy and Spain and EU Parliamentary elections at the end of May, it’s logical to believe that the UK’s negotiating position will improve over time.
As such, we see scope for the Sterling to improve against a weakening Euro and AUD, while firming marginally against the USD over the next few weeks.
We are currently flat the Sterling. We suggest short-term traders can look to sell the GBP/USD at 1.3060 with an initial target of 1.2635 and a 1.3165 stop.
A report from Reuters this week outlined how many Italian banks are struggling to borrow in the private markets now that the ECB has stopped its QE purchase program.
It’s estimated that Italy’s largest banks will need to raise between €50 and €60 billion to meet their Net Stable Funding Ratios by the end of June. In this environment, it seems very unlikely that the ECB will be able to adjust benchmark interest rates higher. Next week’s ECB meeting could make reference to another round of TLTROs.
We are currently holding short from 1.1465. We suggest holding short from 1.1465, or better, with an initial target of 1.1225 and a 1.1555 stop.
The Aussie dollar got an intraday lift on the WSJ headlines that the US may lower tariffs on China in front of the Lunar New Year holiday in early February. The bounce was capped at .7220 when the US Treasury department denied the rumour.
Expectations of a RBA rate cut this year have been growing with AMP forecasting overnight rates at 1.0% by mid-2020. We are currently short AUD/USD from .7120. We suggest looking to add to short positions at .7190, or better, with an initial target of .6870 and a .7285 stop.
The USD/JPY continues to recover from the flash crash on January 3rd but will be tested near the 109.80 resistance level.
And while global equity markets have firmed this week, the correlation of the pair with the SP 500 suggests buying lower makes more sense than joining momentum trades higher. As such, we prefer to work buy orders below the current market.
Our trade suggestion to buy at 106.80 was not filled, which leaves us flat. We suggest lowering the bid to 106.35 with an initial target of 108.80 and a 105.40 stop.
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