Sterling was the major focal point in the FX markets, during Tuesday’s trading sessions, GBP/USD traded at a high not seen since September 2018, whilst EUR/GBP fell to a low not witnessed since May 2017. The reason for investors’ bullish sentiment regarding sterling, related to Mrs. May, the P.M. of the U.K. making a statement in the House of Commons, that if MPs don’t vote through her meaningful vote again, they’ll have the right to vote for a delay.
Quite why the FX markets have reacted so positively to a delay of possibly two months, with no long term solution still provided or discussed, once again illustrates how sensitive sterling is to any Brexit news, positive or negative. However, an illustration of how bullish FX markets are for sterling, came after the U.K. government finally released their Brexit, impact, assessment papers, during the latter stages of the London-European trading session. The findings indicated that the U.K. economy would shrink by circa 9% under a no deal exit, but the release had no negative impact on the value of sterling.
At 18:30pm U.K. time on Tuesday, GBP/USD traded at 1.325, close to R3, up 1.20% on the day and is now trading significantly above the 200 DMA, sited at 1.299. Measured over a yearly basis, the major pair is down -4.70% and still some distance from the approx 1.520 four year high, reached before the June 2016 referendum result. Sterling experienced similar gains as a base currency, versus its other counter peers, during Tuesday’s sessions. EUR/GBP fell by 0.82% down to 0.858, reaching a level not seen since May 2017. The euro experienced mixed performance versus several peers, EUR/USD traded up 1.18% at 1.138, whilst EUR/JPY traded down -0.17%.
The dollar index, the DXY, slipped during the afternoon session after Jerome Powell delivered his testimony to the Senate banking economy. The narrative contained no surprises; the overall message could be considered as dovish, based on the fact that Mr. Powell intimated the FOMC/Fed were in no particular rush to reimplement the hawkish policy of 2018, which saw interest rates rise three times during the year. Mr. Powell referenced the USA labor market, which he appeared to doubt the overall strength of. His caution may have been evidence based, and most likely in his privileged position, he’s had early access to critical data, such as the latest Q4 GDP figures, to be published on Thursday.
The USA housing data published on Tuesday was disappointing, housing starts fell to a two year low. Starts crashed by -11.2% month on month in December, missing the forecast of a 0.1% fall. Permits beat the forecast but only marginally, coming in at 0.3% for December. Such a huge miss in starts will have caused a sharp intake of breath in the house building sector. Such an extreme fall cannot be blamed on a seasonal slowdown, or dismissed by the govt. shutdown in January.
Analysts will now carefully examine all housing data over the coming months, for signs of structural weakness, or recession in the sector. According to the Case Shiller house price index for the leading twenty USA cities, prices missed the forecasts by coming in at 4.1% year on year and 0.19% month on month. Overall USA equity indices closed down marginally on Tuesday; SPX down 0.08% and the NASDAQ down 0.07%. USD/JPY ended the day trading down 0.47% at 110.55. WTI oil recovered from the glut related sell off experienced on Monday, a barrel of oil was trading at $55.99, at 22:15pm U.K. time.
Wednesday’s critical economic calendar events include the release of data for: Europe, Canada and the USA. There are various confidence and sentiment readings for the Eurozone which will be broadcast on Wednesday morning. Although not ranking as high impact, due to the recent slew of poor data relating to: Germany, France and the wider zone, analysts will be wary of any significant misses. In the early afternoon Canada’s latest CPI reading will be published. Reuters are forecasting a figure of 1.40% for January year on year, a fall from 2%. Such a reading could cause intense speculation in the Canadian dollar, based on the fact that Canada’s central bank has a two percent target. Analysts and FX traders could surmise that with inflation so weak, the economy could easily withstand interest rate rises in the near term.
The leading high impact data release for the USA concerns the advanced retail trade figures, the Reuters forecast is for a -$74.5b deficit for December. A figure that the Trump administration have a hawkish eye on, as they’re determined to shrink this figure, both monthly and annually. Mr. Powell, the Fed chair, will deliver his second Washington address over two days, this time to the house panel at 14:45pm. Thereafter, a series of data releases concerning; pending home sales, factory orders and crude and gas inventories, will be delivered. Traders will have to remain vigilant regarding the values of: the U.S. dollar, the equity indices and the price of oil, as the various data is broadcast throughout the New York afternoon session.
