Sterling rises on Brexit negotiation optimism, U.S. dollar falls as Chinese trade talks indicate little progress
Market analysts and FX traders were left confused on Tuesday as sterling rose by circa one cent versus the U.S. dollar. The significant move of GBP/USD, by circa 1% during the afternoon’s New York session, crashing the major pair up through the third level of resistance, R3, didn’t appear to be supported by any positive news, with regards to the U.K. Or by any technical analysis issues, other than the round number and handle of 1.300, still acting as a gravitational, magnetic force, for many institutional level orders to be clustered. At 21:30pm U.K. time, GBP/USD traded at 1.306, the highest level printed since Monday February 4th.
The only possible explanation for the rise in cable, could be due to the leaked reports, emerging on Bloomberg and the F.T. that prime minister May is heading to Brussels and is prepared to take out her parliament amendment, requesting the Irish backstop is removed from the withdrawal agreement. But rather than be regarded as progress, such a move simply reverts her plan B back to plan A, a plan that was voted down, in record numbers, by the U.K. House of Commons. Such a late move by the U.K. govt and prime minister, would simply reconfirm the actual withdrawal agreement, that the E.U. created in late 2018.
EUR/GBP crashed through the third level of support, to fall through the 0.8700 handle to 0.865, closing out the day at a level not witnessed since January 21st. Versus its other peers sterling also made significant gains. Sterling traders should use the example of this sudden, inexplicable bullish move, on the basis of unconfirmed rumours and no detail, as to how highly sensitive the U.K. pound will be to any breaking Brexit news, as the clock ticks down to the March 29th exit date.
Part of sterling’s appreciation during Tuesday’s sessions, could be attributed to the dollar weakening, versus the majority of its peers. The dollar index, DXY, ended the day trading down 0.40% at 96.52, giving up position above the 97.00 handle, a level at which the measure of a basket of dollar peers, has traded near to for several sessions. EUR/USD traded at 1.134 at 21:45pm U.K. time, up 0.30%.
With the exception of a substantial 0.82% fall versus sterling, the euro experienced mixed fortunes during Tuesday’s trading sessions, versus the majority of its peers. Falling versus both Australasian currencies, NZD and AUD, but rising versus JPY (as most currencies did), following on from Mr. Kuroda, the Governor of the Bank of Japan, suggesting that more monetary stimulus could be enacted, in order to stimulate a moribund domestic economy. USD/JPY closed out the trading day close to flat, as the U.S. dollar fell versus the majority of its peers. The main USA equity markets all closed up, after experiencing fluctuations during the New York session. The DJIA closed up 0.03%, SPX up 0.15% and the NASDAQ up 0.19%.
News broke during the latter part of the USA trading session, that the USA negotiators involved in the China-USA trade talks, are seeking a commitment from the Chinese PBOC (People’s Bank of China), to not devalue the yuan. According to Bloomberg; the USA wants to include (in a memorandum of understanding), as part of a final trade deal, an agreement from the Chinese central bank and politburo, that they will not devalue their currency, to counteract any U.S. tariffs placed on imports from China.
Wednesday’s key high impact news release, is the minutes relating to the January FOMC meeting. FX traders would be advised to remain vigilant to this event, when the minutes are released at 7:00pm U.K. time. Investors, FX traders and FX analysts, will rapidly examine the minutes for any clues, in the form of what’s termed “forward guidance”, to suggest that the FOMC/Fed have altered their current monetary policy.
During the press conference in January, when Jerome Powell, the Fed chair, announced that the key interest rate would remain at 2.5%, he projected an overall dovish tone. This could suggest that the FOMC/Fed are considering abandoning their previous hawkish monetary policy pledge; to raise the rate incrementally throughout 2019, in order to complete a normalisation process. This high impact event comes at a time in the evening when liquidity and trading activity is traditionally lower, therefore FX traders should be mindful of the ability of the release to move FX markets in USD.
« Focus will turn to the FOMC rate setting minutes on Wednesday evening, for evidence that a dovish monetary policy is developing Yen falls as Japan’s exports collapse, the balance of trade deficit also worsens, U.S. dollar struggles for direction, as FX traders await the FOMC minutes »