Sterling major FX pairs whipsaw violently as Brexit talks reach crunch time, USA main equity index the DJIA enjoys a tax plan boost

Dec 5 • Morning Roll Call • 33 Views • No Comments

Both the DJIA and SPX initially reacted favorably to the news that the Republicans’ tax reform program had passed a vote in The Senate early Saturday morning, making it highly likely that (in its present form) the reforms will now become law. Investors wasted no time in immediately translating the reforms as a gift for major corporations, in terms of increased profits and shareholder dividends. However, late evening the SPX turned negative, whilst the tech heavy NASDAQ fell during the day by over 1%, as the tax reforms will benefit this sector least.

The U.S. dollar was also boosted by the Senate vote, USD/JPY rising by circa 0.3% on the day, with similar gains recorded versus the euro, safe havens such as gold also suffered a modest sell off during the USA indices rally. Even the looming issue of a partial USA government shutdown, due to the government being on target to breach its legal debt limit later this week, whilst operating a debt v GDP level of 106%, failed to dampen investor sentiment. In terms of calendar news USA durable orders fell less than expected in October; coming in down -0.8%, factory orders also beat the Reuters forecast; coming in down -0.1%.

Brexit optimism was high in Brussels, from both the U.K. team and the E.U. Brexit steering committee in the morning and midafternoon, as claims and counter claims, with regards to the progress, were delivered by both parties. The coordinated message appeared to suggest that an agreement had been reached on: E.U. citizens’ residency rights in the U.K. after Brexit, the divorce settlement bill, the European courts of justice having overriding powers during a transition period and the Irish border issue. This backdrop of optimism was bolstered by the latest Markit PMI for U.K. construction print beating the forecast for November, by coming in at 53.1.

Unfortunately, for prime minister May, she appeared to get ahead of herself promising a unique status for Northern Ireland, in terms of a customs union and single market that her political partners the DUP could never sanction. The DUP would never agree to an arrangement that would see a different status for Northern Ireland compared to the rest of the U.K., particularly a deal that could be translated as a United Ireland. Sterling whipsawed violently throughout the day, rising and falling, as optimism was raised and then crashed. On reflection, given the failure of the talks to move forward, it’s surprising that FX traders didn’t short sterling further.

However, perhaps optimism remains that a deal can still be stitched together before the deadline day of Wednesday, the day the leading E.U. negotiator Michel Barnier has to report to his commissioners if sufficient progress has been made to allow the U.K. to move to stage two; discussing a trade deal. It’s a fairly safe bet, based on the price action witnessed on Monday by GBP/USD and EUR/USD, that more of the same will be witnessed until some form of concrete resolution is reached. Until such time sterling traders should exercise great caution; managing leverage, stops, risk and keeping a constant channel open for the latest developments.

STERLING

GBP/USD whipsawed in a fairly tight range during Monday’s trading sessions; falling to S1 as Asian markets opened, rising up through the daily PP, then steadily falling back through S1 until approx. 11:00am, when the major currency pair reversed direction, pushing up through R1 to a daily high of 1.353. The pair then failed to maintain the level, falling back through S1, eventually closing the day out at circa 1.346, down circa 0.2%. Versus CHF sterling made gains as the Swiss franc safe haven appeal receded, as the recent risk on trading mood on Wall Street was maintained.

EURO

EUR/GBP was the currency cross pair that experienced whipsawing behavior, similar to GBP/USD, during Monday’s trading sessions, as both pairs are highly sensitive to Brexit talks, although the euro based pair traded in a narrower bearish range throughout the day. EUR/GBP fell as markets opened, then rose in the morning European session, breaching the daily PP, to then fall to S2, printing a daily low of 0.875, down circa 0.7%, whilst breaching the critical 200 DMA sited at 0.879, before recovering to end the day down circa 0.2%, at 0.880. EUR/USD traded in a tight bearish range throughout the day, at 1.186, closing down circa 0.3%, close to the first level of support.

U.S.DOLLAR

USD/JPY traded in a tight bullish range during Monday’s sessions, rising through R1 shortly after Asian markets opened, thereafter the major currency pair remained in a range of circa 0.2% closing the day out up approx 0.2%, at 112.4. USD/CHF also traded in a tight bullish range, breaching R1 before London opened, then remaining in the tight range for the remainder of the day, closing up circa 0.3% at 0.985, resting close to R1. USD/CAD traded in a tight bearish range, closing out down circa 0.2%, at 1.267.

GOLD

XAU/USD traded in a narrow bearish range on Monday, falling through S1 to a low of 1270, before recovering to end the day at circa 1274. With the 200 DMA sited at 1266, investors and traders will be eyeing this critical moving average with interest over the coming weeks, if the risk on mood remains intact in USA equity markets, then the level could be tested.

EQUITY INDICES SNAPSHOT FOR DECEMBER 4th.

• DJIA closed up 0.24%.
• SPX closed down 0.11%.
• NASDAQ closed down 1.05%.
• FTSE 100 closed up 0.53%.
• DAX closed up 1.53%.
• CAC closed up 1.36%.

KEY ECONOMIC CALENDAR EVENTS FOR DECEMBER 5th.

• GBP Markit/CIPS UK Services PMI (NOV).

• GBP Markit/CIPS UK Composite PMI (NOV).

• EUR Euro-Zone Retail Sales (YoY) (OCT).

• USD ISM Non-Manufacturing/Services Composite (NOV).

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